16 July 2026: The Incoming UK budget office head sees higher interest rates and weaker growth than the consensus

Jonathan Haskel, a former member of the Bank of England’s Monetary Policy Committee who has been nominated to the Office for Budget Responsibility, said yesterday that he was less optimistic than most other analysts about the outlook for the country's economy.

Britain's exposure to the jump in energy prices caused by the war in Iran could embed high inflation in the economy for several years, Haskel told MPs in a set of written answers.

"My forecast would be, in the medium term, for somewhat higher interest rates and weaker GDP growth than most are expecting," he said in his replies to questions from members of Parliament's Treasury Committee.

Haskel told the committee in a public hearing that Britain was "not in a very good fiscal position" after a big jump in debt as a share of economic output caused by shocks such as the COVID pandemic and the war in Ukraine, and that this had increased political pressure on the OBR.

However, he also said he was hopeful that growth in artificial intelligence would help improve the country's weak productivity record.

The OBR has been criticised for being too optimistic with its productivity growth forecasts and too slow to revise them down, but Haskel came to its defence.

"I think it is right for the OBR to have been cautious," he said. "It is perhaps right for the OBR to move more slowly than those being judged primarily upon their very short-run forecasts."

Bodies such as the OBR should have a high bar for changing key productivity forecasts, lest they be subject to political pressure, and problems with official data during the pandemic had reasonably made forecasters wary about a swift change to long-term forecasts.

However, Haskel said he remained concerned about productivity headwinds from Britain's labour market, which, unlike the Bank, he did not think had regained its pre-COVID flexibility.

Tighter employment regulation being brought in by the government is also likely to weigh on growth, though the details were not yet clear enough to quantify, he added.

Haskel's nomination to chair the OBR is subject to approval by the Treasury Committee.

The organisation has been without a chair since Richard Hughes stepped down after the OBR published its Economic and Fiscal Outlook prematurely, with details of Chancellor Rachel Reeves' 2025 budget, in November last year.

Andy Burnham is set to become the next UK prime minister after receiving 349 nominations from Labour MPs, making it impossible for any other candidate to secure the 81 endorsements needed to challenge for the Labour leadership.

This means the recently elected MP and former Greater Manchester Mayor is expected to formally take over the Labour leadership at a special party conference tomorrow. He will be the Prime Minister on Monday.

With just a few days to go until he becomes the next leader of the country, many are still wondering where Burnham stands on a range of political issues, particularly welfare and pensions.

Burnham said it is 'important' to maintain the Labour manifesto commitment to the triple lock on the State Pension during a Q&A session on social media.

The triple lock ensures the State Pension increases every April in line with whichever is highest among earnings growth between May and July, inflation in September, or 2.5%. This is to prevent the value of pensions from being eroded by cost-of-living pressures.

In April, the State Pension increased by 4.8%, in line with wage growth for May to July. Other DWP benefits were uprated by 3.8% in line with inflation, and the UK minimum wage increased by 4.1% for those aged 21 and over.

Burnham could turn to Shabina Mahmood as his pick for Chancellor of the Exchequer as the incoming Prime Minister looks to build his cabinet.

The unexpected move would see Rachel Reeves replaced by the Home Secretary in a bid to steady the economy.

Ed Miliband is also among the front-runners for the role.

The Energy Secretary is said to be willing to turn his back on Net Zero and support North Sea drilling if he is named to the role under the incoming Prime Minister.

Reports that incoming PM Andy Burnham may appoint Shabana Mahmood as Chancellor triggered a wave of investor relief. Markets interpreted her as fiscally disciplined and pragmatic, in contrast to earlier speculation that Ed Miliband would take the Treasury brief, which investors feared could lead to looser fiscal policy.

GBP/USD jumped to around 1.3500, up 0.76%, and GBP/EUR climbed to 1.1805, up 0.67%.

Markets increasingly expect the Bank of England to keep rates higher for longer due to persistent UK services inflation and wage growth.

Federal Reserve Chair Kevin Warsh sought to evade a range of questions from Senators on issues such as the impact of AI on inflation, his contacts with President Donald Trump, and how the Central Bank will determine the persistence of inflation during his second day of testimony before U.S. lawmakers.

Warsh has said since taking office several weeks ago that he would provide less guidance on the Fed’s next interest-rate moves than his predecessors did. Yet he has frustrated many Fed-watchers by largely avoiding explanations of how the Central Bank might respond more generally to potential economic changes.

“I don’t view a one-off change in prices as necessarily being inflationary, because I think there’s a supply response,” he said in response to a question about the impact of massive investment in AI infrastructure. “Will it increase measured prices over the course of the next 12 months? I suspect it will, whether that’s inflationary or not; that’s up to the Federal Reserve, and we’re going to have something to say about that.” However, he did not say when he would comment on it.

Warsh also downplayed positive inflation data released earlier this week that could make his job as Fed chair easier. As inflation fades, it reduces pressure on the Fed to raise its key interest rate to cool borrowing and spending.

U.S. producer prices unexpectedly fell in June, recording their largest decline in 14 months amid a pullback in energy costs, further evidence that inflation was easing before the recent escalation in the Middle East conflict.

The report from the Labour Department yesterday followed Tuesday’s news of a larger-than-expected drop in the monthly Consumer Price Index. Together with a moderation in job growth in June, the data effectively ruled out a Federal Reserve interest rate increase this month.

However, the reports have been overtaken by renewed hostilities between the United States and Iran following last week’s collapse of the fragile ceasefire. Oil prices have risen to a four-week high after Washington reimposed a naval blockade of Iran. The Producer Price Index report also showed more price increases linked to the artificial intelligence build-out, a concern for Federal Reserve officials. These factors keep a rate hike later this year on the table, economists said.

During his second day of testimony, Warsh vowed to "do my job" if challenged by President Donald Trump, his most direct comment so far on how he would handle the sort of pressure his predecessor felt throughout much of his tenure.

Asked how he would react if Trump continues to target the Federal Reserve through efforts that included the attempted firing of Fed Governor Lisa Cook, Warsh told the House of Representatives Financial Services Committee that the U.S. Supreme Court had recently reaffirmed the Fed's independence in setting monetary policy.

Cook spoke for herself yesterday but avoided any reference to the ongoing issues with the President. The US economy remains resilient, and risks have increasingly shifted towards inflation rather than employment. Cook reaffirmed her commitment to bringing inflation back to the Federal Reserve's 2% target, according to a statement from the Central Bank.

In delivering her speech on the economic outlook, Cook noted that persistently high inflation continues to place a heavy burden on American households; hence, restoring price stability remains the Federal Reserve's primary responsibility.

"Even though this week's consumer price index and producer price index reports were softer than expected, they still imply that the price index we target rose 3.7% in the 12 months through June. That is 1.7% above our target. We have not reached our 2% target in more than five years," she added.

Manufacturing activity grew significantly in New York State, according to the July Empire State Manufacturing Survey. The diffusion index for General Business Conditions remained positive for a fourth consecutive month, rising 9.9 points to 15.6 and beating the 9.3 forecast.

The dollar index fell yesterday, posting one of its sharpest single‑day declines in weeks. The index closed at 100.274, down 0.43% on the day.

Fresh US inflation data showed a sharp deceleration: Headline inflation fell to 3.5% (from 4.2%), while core inflation dropped to 2.6%. Markets immediately repriced the July Fed meeting, cutting the probability of a July hike to circa10%, down from circa 35%.

This repricing triggered broad USD selling across G10 currencies.

The European Central Bank will reassess its interest rate decision next week following renewed clashes between the U.S. and Iran, Bundesbank President Joachim Nagel said yesterday.

"The renewed outbreak of military conflict in the Middle East and the fresh rise in oil prices underline that the situation remains extremely volatile and that uncertainty is similarly high," Nagel told Reuters.

The ECB will hold its next monetary policy meeting next week. It hiked rates at its last meeting, taking them from 2% to 2.25%. Previously, it had cut rates four times in the first half of 2025.

ECB policy must remain sufficiently measured to keep inflation expectations anchored even amid an uncertain geopolitical situation, Bank of Italy chief Fabio Panetta said.

“When considering future decisions, the Governing Council will carefully assess conditions in energy markets, and the evolution of the economic situation, wages, and prices for goods and services,” he said in a speech in Rome. “The objective is to keep inflation expectations firmly anchored, limiting the indirect and second-round effects of shocks.”

The remarks are part of a flurry of final thoughts from ECB officials before a quiet period begins today, ahead of the July 23 meeting.

Policymakers have so far shown little consensus on their next steps after a June rate hike made the Eurozone the first in the G7 to take such action since the start of the war in the Middle East.

The new Governor of the Banque de France, Emmanuel Moulin, also took to the airwaves yesterday, ahead of the ECB ‘blackout’, telling France 5 television that the European Central Bank should be prepared for swings in the inflation rate due to an unpredictable situation in the Middle East.

The potential for price changes will depend on whether the new crisis is prolonged and whether Iran and the US can strike a deal, he added.

“We are living with very high volatility,” Moulin said. “That is why we need to be prepared for all eventualities.”

It appears that the French, German and Italian Central Banks will form a hawkish cabal at next week's meeting.

Volkswagen CEO Oliver Blume warned in an internal memo that the automaker may need to cut a further 50,000 jobs, on top of the 50,000 already agreed, according to Reuters, effectively confirming for the first time that the company is considering eliminating up to 100,000 positions in total.

The memo cited a 20% cost gap between Volkswagen and comparable rivals as the basis for potential reductions. Blume wrote: "A theoretical calculation, assuming no change in labour costs, would result in around 50,000 job cuts worldwide." He noted that work is ongoing to assess, across every brand, subsidiary, and region, the extent to which any such reductions would be needed.

The Euro was essentially flat to slightly weaker yesterday, with very limited movement compared with the sharp rally in sterling. This kept the EUR/USD exchange rate within its recent range, reaching a high of 1.1482 and closing at 1.1463.

Have a great day!