15 July 2026: Renewed US-Iran hostilities raise concern for the Bank of England Governor

Bank of England Governor Andrew Bailey told MPs yesterday that he is concerned about the renewed outbreak of hostilities between the United States and Iran, but that the impact on the UK's inflation outlook has so far been modest.

Bailey voted last month, along with a 7-2 majority on the Monetary Policy Committee, to hold interest rates.

At that point, he assessed the risks from the conflict in Iran as falling towards the lower end of the Central Bank's three scenarios.

"But I would have added the very strong caveat that it seems to me that the situation remained unstable, and the ceasefire was fragile," said Bailey, speaking before the Treasury Select Committee. "I think where I am now, at this moment, is that the instability I feared has come to pass. It underlines that this is going to be an unstable process for the foreseeable future."

The Central Bank Chief said economic data pointed to limited pass-through to domestic prices. "We are seeing continued fairly soft evidence on the pass-through into UK prices," he said.

Gilt yields rose earlier in the day to their highest level since May as investors raised their expectations of rate rises by the Bank of England, driven by rising inflation amid US-Iran tensions and comments from the Federal Reserve Chairman signalling a potential increase in US borrowing costs.

Asked whether a change in Prime Minister would affect financial stability, Bailey declined to comment on political matters, but said the UK outlook was underpinned by the Government's Fiscal Framework and the Bank's monetary policy settings.

Former Manchester mayor Andy Burnham, who is expected to replace Keir Starmer as Prime Minister next week, has pledged to adhere to existing fiscal rules. However, some investors remain concerned about the prospect of increased public spending, likely funded by higher taxes.

Bailey identified growth as the central challenge for the UK economy. "I think the big issue is growth in the economy," he said. "So I think we can do all we can on financial stability." This final comment contrasts sharply with that made by the Bank’s Chief Economist last week, in which he cited rising inflation concerns as his chief worry and said that growth was rather the Government’s concern.

Bailey went on to warn MPs that a burst in the AI bubble could reduce UK GDP by 2.2%, a figure large enough to push Britain towards recession. The warning, detailed in the Bank’s July 2026 Financial Stability Report, paints a picture of an economy increasingly vulnerable to the fortunes of a handful of tech companies an ocean away.

Bailey has described what he called a “triple whammy” threatening financial stability. First, bets on AI companies have become dangerously one-sided; second, nobody knows how quickly AI adoption will proceed or what its effect on business profitability will be; and third, it’s still unclear which companies will survive the inevitable shakeout.

AI firms now account for roughly 50% of the US S&P 500’s total market value. In 2022, that figure was 25%. Capital expenditure expectations for AI-related sectors now exceed $1 trillion by 2028. That’s up from less than $600 billion just six months earlier, in December 2025.

Former Manchester Mayor Andy Burnham will become the Leader of the Labour Party on Friday and replace Sir Keir Starmer as Prime Minister on Monday.

Burnham is leaving Greater Manchester with £1.34 billion in outstanding borrowing, the largest debt pile of any combined authority in England, as he prepares to enter Downing Street.

Government figures show that under the former mayor's stewardship, borrowing stood at £1.34 billion at the end of the last financial year, up from £964 million at the start of his tenure in 2017.

When measured against its population, the Greater Manchester Combined Authority's borrowing now equates to £462 per resident, making it the second-highest of any combined authority in England, behind Birmingham.

The West Midlands Combined Authority, by comparison, has accumulated borrowing of £544 million, meaning Greater Manchester's total is almost two and a half times higher.

The pound rallied strongly as market expectations of a rate hike in the UK were raised by Bailey’s comments. It reached a high of 1.3443, although it drifted back to close at 1.3396.

Federal Reserve Chair Kevin Warsh testified before the House Financial Services Committee, emphasising the Fed's firm stance against persistently high inflation and its commitment to restoring price stability.

He explained that inflation concerns led to the decision to keep interest rates unchanged in June. Warsh also reaffirmed the Fed's independence, responding to questions about political interference and stating that he would continue his duties while resisting any attempts by the President to influence policy. This testimony signals the Fed's focus on controlling inflation while maintaining autonomy in monetary policy decisions.

"If we get policy right, and I can assure you we will, the inflation surge of the last five years will be a thing of the past," Warsh said in his opening statement, adding that he and his colleagues on the FOMC "have no tolerance for persistently elevated inflation."

"We are committed to the 2% inflation goal," he said as questioning from House lawmakers began, later adding that his goal is for price changes to be so undramatic that Americans "don't have to think about it, they don't have to talk about it."

Warsh's strong words on inflation could be a further signal to markets that interest rates are likely to remain elevated for the time being.

However, his remarks came after new inflation data showed prices cooled in June, easing some pressure on the Fed. The Consumer Price Index for June registered at 3.5%, down 0.4% from a month earlier, as consumer prices grew more slowly than expected, driven by lower gas prices.

Warsh downplayed the importance of Tuesday's data, calling it limited evidence of a price slowdown.

A swirling mix of forces could cause “meaningful disruptions” to the U.S. economy, according to JPMorgan Chase CEO Jamie Dimon.

In a statement yesterday accompanying his bank’s latest quarterly financial results, Dimon said the economy remained “resilient” despite risks that are “swirling below the surface.” His latest remarks extend a theme he has emphasised for months; in April, for example, he cited “an increasingly complex set of risks.”

“The U.S. economy has demonstrated notable resilience this year, with stronger business investment and hiring,” Dimon said in notes accompanying the Bank’s quarterly results release. “This strength is being supported by several tailwinds, including AI-driven capital investment, fiscal stimulus and the benefits of more efficient regulation.

However, several risks are shifting below the surface like tectonic plates, including geopolitical tensions and wars, sticky inflation, large global fiscal deficits and elevated asset prices.”

Speeches by FOMC members yesterday were like a roll call of the Fed’s Rate-Setting Committee. Vice Chair, Michael Barr kicked things off, followed by Chicago Fed President Austan Goolsbee,

He was followed in turn by Fed Governors Michelle Bowman and Lisa Cook. All welcomed the fall in inflation but also warned that any respite could be temporary, given the heightened tensions in the Gulf.

The dollar index began the day on the back foot following Andrew Bailey’s comments, but perked up on Kevin Warsh’s moderately hawkish comments. It reached a high of 101.32 but fell back to close at 100.93 as traders and investors believe that the Fed will stand pat for the rest of the year.

The European Union's legislators, in a vote in Strasbourg last week, gave the green light to the Digital Euro.

As a result, the European Parliament can begin negotiations with Member States on the details of the new currency's design and operation.

The ECB argues that it is necessary to maintain the benefits of cash in the digital age, protect Europe's monetary sovereignty, and offer a fast, secure, and widely accepted public means of payment.

However, according to the well-known economist Daniel Lacalle, it is not a neutral or exclusively technological upgrade of European payment infrastructure.

It is a political and technological venture that may integrate surveillance, monetary control, and fiscal sovereignty into the very structure of the currency, the economist argues.

EU legislators are now debating the regulation that will determine the status, privacy-protection framework, and holding limits for digital currency, while the ECB is openly lobbying for strong legislation to support what it describes as a collective step forward for Europe.

This means that its most important features, including programmable functionality, limits, data access, and the role of commercial banks, will be decided in Brussels and Strasbourg, rather than by the markets or citizen demand.

The ECB presents the digital euro through four key promises: more efficient payments, greater monetary sovereignty, financial inclusion, and higher privacy than today's private electronic payment systems.

Europe already has instant payment systems, multiple card systems, and a dense network of private providers that enable fast, cheap electronic transactions across the eurozone and internationally.

No indication that adding a centralised, programmable Central Bank Account for every citizen solves a problem that existing infrastructure cannot address through open competition, decentralised independent choices, and innovation.

The European Central Bank (ECB) has selected 36 payment service providers from across the Eurozone to join a Digital Euro Pilot beginning in the second half of 2027, advancing the bloc’s Central Bank digital currency from design work towards live testing. Running for 12 months, the pilot will operate at the ECB and 19 National Central Banks, drawing on a pool of more than 50 applications that followed a March 2026 call for expression of interest.

The selected group of banks and non-bank providers spans a range of business models, sizes, and geographies, providing the Eurosystem with a representative environment to test how a digital euro would perform in everyday transactions. The exercise picks up where the ECB left off in December 2025, when it completed its preparatory phase, and President Christine Lagarde handed the issuance decision to EU lawmakers.

Spain reaches the midpoint of 2026 in a relatively robust state compared with the Eurozone, driven by dynamic employment and consumer spending, healthier private-sector balance sheets, and more diversified foreign trade.

These are some of the findings published in the Esade Economic and Financial Report for the second half of 2026, produced with support from Banco Sabadell and led by Madrid- and Barcelona-based Business School Esade Professor Omar Rachedi.

According to current forecasts, Spain’s GDP will grow by some 2.2%–2.3% in 2026, compared with approximately 1.1% in the Eurozone. In other words, Spain is expected to grow at almost twice the pace of the Eurozone.

Furthermore, the baseline scenario suggests that this forecast might be slightly adjusted upward between now and the end of the year.

The report suggests that Spain is entering a new phase of the economic cycle. After several years of growth underpinned by employment, consumer spending, tourism, European funds, demographic growth, and healthier private-sector balance sheets, the challenge is now to consolidate these gains by increasing productivity.

In this respect, the authors emphasise that although Spain’s proven resilience mitigates its vulnerability to external shocks, it is no substitute for increasing potential growth through investment, productivity, and supply-side capacity.

The report highlights Spain’s significant advantages in renewable energy, regasification capacity, and a relative improvement in industrial energy prices.

However, it also points out that this potential must translate into a tangible advantage for the economy as a whole. Although green electricity makes a considerable contribution, electricity pricing is still driven by gas, indicating that the energy transition depends not only on the deployment of renewables but also on the ability to deliver clean, competitively priced, and stable electricity across the entire production system.

The Euro climbed to a high of 1.1462 yesterday, matching the highs it has seen over the past approximately ten sessions. It fell back to close at 1.1420, as the market now believes that the ECB is unlikely to raise rates again this month.

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