3 July 2026: Monetary policy hasn’t been sufficiently restrictive over the past two years

The Bank of England's Chief Economist, Huw Pill, has again defended his recent calls for higher interest rates, warning policymakers against complacency about inflation and the rising cost of living. Pill voted to raise interest rates to 4% at the Bank’s last two Monetary Policy Committee meetings, going against the majority in April and, in June, being joined by only one other member, Megan Greene.

Pill’s concerns stem from inflation remaining above the BoE’s 2% target. He cautioned that recent increases in oil and gas prices could push inflation even higher. According to Pill, inflation at 3% should still be considered problematic, despite the tendency to view it as manageable after the UK experienced a peak of 11% inflation in previous years.

He emphasised that his dissent was not motivated by publicity or a desire to challenge the committee, but by a genuine concern that monetary policy has not been sufficiently restrictive. Pill suggested that interest rates may have been lowered too quickly in recent years, allowing inflationary pressures to persist.

The BoE has been cautious about further cuts due to inflation risks linked to higher energy prices. Governor Andrew Bailey has supported keeping rates unchanged, noting that energy prices continue to create inflationary pressure even after oil prices eased following a peace agreement.

Pill concluded that the global economic environment is becoming increasingly uncertain and complex, stressing that the Bank’s priority should be to ensure monetary policy does not add further instability.

The market is still pricing in 22 bps of tightening by year-end.

Sir Keir Starmer’s plan to boost defence spending by £15 billion is facing fresh scrutiny after Downing Street remains unable to say exactly where the cuts required to pay for it will come from. This is despite the supposedly “long and strenuous efforts” to present a comprehensive, fully funded plan.

The Prime Minister unveiled the defence investment plan on Tuesday, promising to increase defence spending by £15 billion and modernise the armed forces to prepare for drone attacks and the threat from Russia.

The Government has yet to spell out how almost a third of the plan will be funded, with a decision on where that £4.7 billion will come from to be made at the Budget in the autumn.

That will prove a headache for Sir Keir Starmer’s successor in No 10, likely to be Andy Burnham, who was only briefed about the funding black hole on Tuesday, although its size is still unclear.

But the Government has also provided scant detail about where the remaining £10.3 billion in cuts to Whitehall spending, which will fund the plan, will come from.

Departments across Government must slash 1% off their spending on major projects to pay for the defence boost, while transport and energy spending will face larger cuts.

No 10 revealed that road-building projects in Derby and Lincolnshire are among those being sized up for cuts. However, it is doubtful whether these cuts will provide any more than a fragment of the required savings.

Renowned British businessman Sir Martin Sorrell has claimed that AI can be a leveller in a ‘K-shaped economy’, and outlined a key challenge for the incoming Prime Minister.

As the AI boom looks set to reshape the global economy, for better or worse, the UK needs to gear itself up for growth and innovation, according to Sorrell.

He expressed strong concern about what he sees as the UK’s tendency to stifle growth with excessive red tape, something he finds particularly worrying in the AI “arms race.”

“I don't want the UK to end up being the best at regulation. We want innovation, not regulation,” said Sir Martin, throwing down the gauntlet to outgoing PM Sir Keir Starmer and his likely imminent successor Andy Burnham.

“At a time when the UK economy is at a standstill, the UK doesn't see any growth. We're at zero growth despite what Rachel Reeves says. Unlocking the economic opportunities brought by big tech and fostering innovation are, said Sir Martin, top priorities for whoever ends up leading the British government”. It is the core priority which Sir Martin has identified.

Sterling rallied yesterday primarily because the U.S. dollar weakened sharply after disappointing U.S. labour data, and because UK political risk fell, while expectations of a cautious Bank of England on rate cuts strengthened.

The pound reached a high of 1.3384 and closed at 1.3346.

The June employment report, published a day earlier than usual due to America’s 250th-anniversary celebrations tomorrow, initially disappointed markets, as the economy “only” created 57k new jobs.

Despite the downbeat nature of the report, employment figures for June showed the American economy continues to move past obstacles, including the inflationary pressures of the war with Iran.

The unemployment rate fell to 4.2% from 4.3% the previous month. In recent years, economists have remarked with surprise at the resilience of the American economy. At the midpoint of 2026, with the volatility caused by President Trump’s tariff hikes mostly baked in and the war with Iran potentially winding down, economic durability may be the emerging norm.

On a positive note, employment in professional and business services, which fell overall from 2024 to 2025, has trended upward since the start of 2026, and the sector added 36k jobs in June. Jobs in social assistance and health care have continued their steady gains.

Despite a bump in activity from the World Cup, leisure and hospitality employment declined by 61k in June. Labour economists have noted, though, that this summer’s numbers may be a noisy reflection of seasonal adjustments in the data.

This was the fourth consecutive monthly increase in jobs, an impressive turnaround from the slowdown that occurred throughout 2025. The Bureau of Labour Statistics found that U.S. employers added only 181k jobs last year, far fewer than the 1.5 million added in 2024.

Gregory Daco, the Chief Economist at EY, said he anticipates job growth will stabilise at approximately 70,000 per month for the rest of the year, and the unemployment rate may edge up, but only slightly.

The unemployment rate has been at or below 4.5% since October 2021, the longest streak of low unemployment since the long expansion in the late 1960s. Still, an unusually low number of people are quitting their jobs; surveys show workers are staying put because they lack confidence in finding better opportunities.

At the turn of the century, anything below 5% was considered full employment, which shows how the market has changed as innovations, culminating in the emergence of AI, arrived in the first quarter of the new century.

Speaking at a Banco de España conference in Santander, Spain, San Francisco Federal Reserve President Mary Daly said she doesn't see any signs of economic resilience in the US being lacking, despite above-target inflation.

"If Central Banks act too quickly, it could prematurely bridle things; if we act too slowly, it could be unwelcome for citizens."

"We are in the early stages of a potential exponential rise in productivity gains from AI. Currently, in the US, there's exceedingly strong investment growth, while the labour market is stabilising."

Inflation has risen due to tariffs and the oil price shock, which is thankfully abating.

Following the FOMC’s cautious approach, US monetary policy is slightly restrictive. That should help inflation come down. There is a scenario in which the Fed has to fight inflation, but there's also a scenario in which growth doesn't continue. We can't decide right now, and don’t want to give false guidance on rates."

Federal Reserve Chair Kevin Warsh said yesterday that the Central Bank will remain politically independent and focused on bringing inflation down, a message that suggests rate cuts are unlikely in the near term despite President Donald Trump’s calls for lower borrowing costs.

Warsh made the remarks at the ECB-run Central Banking Symposium in Sintra, Portugal, during one of his first major public appearances since becoming Fed chair in May. According to AP, Warsh emphasised the Fed’s commitment to price stability as inflation remains above the Central Bank’s 2% target.

The June jobs report triggered a broad sell‑off in the dollar as markets dialled back expectations for further Fed tightening. The dollar index fell to a low of 100.56 and closed at 100.87.

The Eurozone’s unemployment rate reached record lows in both April and May, underscoring the labour market’s continued resilience despite elevated economic disruptions stemming from the conflict in the Middle East.

The jobless rate across the region was unchanged in May, following a downward revision to 6.2% for April, according to the European statistics agency Eurostat. A consensus of economists polled by The Wall Street Journal had expected a higher reading of 6.3%.

The unemployment rate has hovered near historic lows for more than a year, most recently hitting 6.2% in December 2024.

“The Eurozone labour market remains a bastion of stability and strength despite wild swings in energy prices,” said Claus Vistesen, Chief Eurozone Economist at Pantheon Macroeconomics.

The number of unemployed people fell by 55,000 in May compared with April.

High energy prices continued to put pressure on businesses across the Eurozone in May, with manufacturers reporting sharp increases in input costs.

In what is a historically unusual event, the Danmarks Nationalbank moved to support the Kroner after the currency slid to its weakest level against the euro since the late 1990s, triggering the kind of intervention the bank hadn’t needed to deploy since December 2022.

The Danish Kroner has been pegged to the euro since January 1, 1999, at a central rate of 7.46038 DKK per euro, with an official fluctuation band of ±2.25 %.

In practice, Danish authorities keep things far tighter, typically within 0.5% of that central rate.

Denmark’s foreign exchange reserves stood at approximately $111 billion as of late 2025, representing around 25% of the country’s GDP.

Central Bank interventions in a fixed exchange rate regime work through direct market purchases of the domestic currency. When the krone weakens, the Central Bank buys kroner and sells foreign currency, primarily Euros, injecting demand into the market to push the exchange rate back toward the central rate.

The ERM II framework also provides a backstop. The European Central Bank is obligated to support ERM II currencies within their bands if needed, giving Denmark an additional layer of institutional backing beyond its own reserves.

Danish insurance and pension funds reduced krone balances, contributing to the currency’s drift lower. This change in structural flow added to the pressure on the peg.

Just three weeks after the European Central Bank unanimously raised interest rates in response to the war in Iran, there’s no consensus on what to do next.

Divisions over whether borrowing costs must rise further to bring inflation back to 2% surfaced over the past few days as officials gathered in Sintra, Portugal, for their annual symposium. Doubts that another move will happen this year have also crept into markets.

In one camp are policymakers like Chief Economist Philip Lane, who warn that inflationary forces unleashed at the start of the conflict are still unfolding and could show up in everything from stronger wage demands to delayed increases in food and service costs.

Others, though, are pleasantly surprised by tumbling oil prices following headway in peace efforts, and aren’t convinced there’ll be major second-order effects. June’s hefty drop in euro-zone inflation backs that view. Bloomberg Economics reckons it’s peaked.

The Euro moved higher yesterday in response to a tumbling dollar. It rallied to a high of 1.1472, but following a realisation that the NFP data was not as bad as first thought, the single currency fell back to close at 1.1431.

Have a great day!