17 July 2026: Breeden says the MPC will act if inflation appears to be becoming embedded

New data from the Office for National Statistics (ONS) show that UK GDP grew by 0.7% in the three months to May 2026, down from 0.8% in the three months to April.

The growth was driven by a 0.7% increase in the services sector, alongside a 1.6% rise in construction and a 0.1% increase in production.

The services sector was the largest contributor to growth over the period, with output in consumer-facing services up 0.5%. The strongest positive contributions came from wholesale and retail trade, which is also grouped with the repair of cars, trucks and motorcycles, up 1.3%.

However, some areas of the economy continued to decline, with food and beverage service down 0.9% and travel agency, tour operators and other reservation service activities down 2.8%.

Monthly GDP also grew in May, up 0.1% after a 0.1% fall in April. The monthly rise was supported by a 0.3% climb in services output, although this was partially offset by falls in production (down 0.5%) and construction (down 0.8%).

The latest figures mark the sixth consecutive period of three-month on three-month growth, with the UK economy expanding by 1.1% in the three months to May 2026 compared with the same period a year earlier.

Bank of England Deputy Governor Sarah Breeden has said that UK inflation would have reached the Bank’s 2% target without the war in the Middle East. She also said the shock from the war in Iran is less likely to become embedded in inflationary dynamics, and that the BoE is well placed to monitor developments. This echoes recent comments by the Bank’s Governor, Andrew Bailey.

Breeden went on to say that cyber risks exposed by recent advances in AI models have risen to the top of the Bank's concerns. In a Bloomberg interview yesterday, Breeden also discussed the threat posed by elevated artificial intelligence stocks, the easing of some capital rules for UK banks, and the economy.

The biggest upheaval in UK politics since the General Election will begin today as Andy Burnham takes over as Leader of the Labour Party, marking the end of Sir Keir Starmer’s political career.

Burnham will be installed as Prime Minister on Monday.

There is plenty of speculation about Burnham’s Cabinet, with the Chancellorship attracting the most headlines.

It is now considered certain that Rachel Reeves will lose her job, with Home Secretary Shabana Mahmood likely to get the nod ahead of Energy Secretary Ed Miliband.

Andy Burnham’s economic policies centre on reindustrialisation, regional power‑shifting, higher taxation of wealth, public control of essential services, and a 10‑year plan to raise living standards.

The pound retreated yesterday as the market interpreted Sarah Breeden’s comments as more dovish than those of her colleagues, who recently pointed to interest rates remaining unchanged or possibly being cut in the future. However, much will depend on the situation in the Gulf.

Sterling fell to a low of 1.3459 and closed at 1.3477.

Fed Chairman Kevin Warsh successfully navigated his first major test before Congress this week. Multiple sources describe his debut testimony as a political and policy test, and he emerged with his credibility intact, projecting firmness on inflation and independence from the White House. Warsh vowed a “regime change” in Fed policy and pledged to eliminate the inflation “tax.”

The latest retail sales report, released by the Commerce Department, showed consumers’ continued resilience despite ongoing economic uncertainty, with consumers buying cars and taking advantage of summer sales events.

Retail sales rose 0.2% in June, after a revised 1% increase in May.

Outside of petrol stations, retail sales rose a solid 0.7%, according to the report.

The government figures aren’t adjusted for inflation, so last month’s decline in fuel prices pulled down petrol station sales and, in turn, the overall retail sales figure.

Business at petrol stations fell 5.3% last month. Meanwhile, sales at motor vehicle and parts dealers rose 1.9%, helped by aggressive manufacturers’ incentives.

Elsewhere, shoppers were selective in their spending, given worries about the economy and the fading benefits of generous government tax measures that had propelled spending earlier in the spring.

Business at clothing and accessories stores, as well as miscellaneous retailers, both posted small declines, and sales at retailers that sell big-ticket items were mixed: furniture and home furnishings merchants were flat, while electronics and appliance stores showed a small increase in June.

Among the bright spots were online sales, which rose 1.9%, fuelled by spending around Amazon’s Prime Day, held from June 23 through June 26. Business at sporting goods, hobby, musical instrument and book stores was up 1.3%, likely helped by spending around the World Cup.

The Philadelphia Fed’s Manufacturing Business Outlook Survey delivered the kind of number that makes economists sit up and take notice. The current general business activity diffusion index surged to 41.4, up from 10.3, absolutely demolishing the consensus forecast of 13.

The diffusion index measures the difference between the percentage of firms reporting increases in activity versus the percentage reporting decreases. 53.1% of surveyed manufacturers reported an uptick in general business activity, while only 11.7% noted a decline.

New orders and shipments both contributed to the survey’s upbeat tone, suggesting the improvement isn’t just in sentiment; it’s showing up in actual order books.

The survey covers manufacturers across the Philadelphia Federal Reserve District, which includes eastern Pennsylvania, southern New Jersey, and Delaware. It’s been conducted monthly since 1968, making it one of the country’s longest-running regional manufacturing barometers.

The dollar index reacted positively to yesterday's economic data releases, which pointed to a more hawkish FOMC meeting when it takes place on 28/29 July.

The index rose to a high of 100.83 and closed at 100.73.

Christine Lagarde continues to stoke speculation that her presidency of the European Central Bank may soon end, but most economists reckon she’ll serve out her term.

Some two-thirds of respondents in a Bloomberg survey expect Lagarde to finish her eight-year stint when it expires next October, setting aside any doubts that might have arisen from occasional hints of alternative plans.

Speculation that the ECB’s first female president might leave prematurely first erupted last year when she was tipped to take over the World Economic Forum. It picked up again in February after reports of an early departure, which she didn’t wholeheartedly deny.

With Marine Le Pen seemingly set to run in next year’s presidential election, Lagarde may be seen as the country’s most viable alternative to a damaging rightward veer.

Former Bank of Spain chief Pablo Hernandez de Cos, who currently heads the Bank for International Settlements, is seen as Lagarde’s most likely successor.

There was a marked increase in the Eurozone trade deficit as energy imports continue to weigh heavily on the overall trade situation, alongside a smaller surplus in the chemicals and machinery categories.

The overall trade situation is a stark change from May last year, when it recorded a trade surplus of €15.0 billion. Looking at the details, exports in May this year were up 0.1% compared to the same month last year. However, imports were up significantly by 10.0% in May this year compared to the same month a year ago.

That brings the January to May year-to-date trade surplus to just €3.3 billion this year, a significant difference from the €78.7 billion surplus posted from January to May last year.

Even the seasonally adjusted figure is not looking pretty, with the trade deficit at €5.0 billion in May this year.

Looking at the breakdown, the energy trade deficit remains the most critical sector, at €30.3 billion in May. That compares with the usual €18-20 billion range before the US-Iran conflict started. The deficit in April was €29.0 billion.

Meanwhile, the trade surplus for chemicals and other related products also dropped further to just €18.4 billion in May. That compares with the larger surplus of €20.5 billion seen in April. The trade surplus for machinery and vehicles is typically volatile, but it also fell to €4.4 billion in May, down from €6.3 billion in April. As most economists expected, the European Central Bank will keep the deposit rate at 2.25% at the July 23 meeting. Still, higher energy prices could prompt another hike as early as September to curb inflationary pressures.

According to another survey, this time of 74 economists conducted on 13–16 July, all expect the ECB to hold rates. However, about 70% of respondents foresee another rate hike in 2026, mainly in September, against the backdrop of rising energy costs.

Although the latest official data show Eurozone inflation fell to 2.8% in June, it remains above the ECB’s 2.0% target, supporting arguments for further rate hikes. Yet weak growth and the absence of clear signs of second-round effects suggest caution.

In financial markets, discussions have arisen about balancing caution with the need to act, a balance that can stifle growth. In recent years, ECB decisions have largely depended on energy prices and global politics, underlining the difficulty of taking further steps.

The Euro retreated yesterday but stayed within its wider range. It fell to a low of 1.1431 and closed at 1.1441.

Have a great day!