3 August 2026: Healey tells cabinet ministers to prepare for budget cuts

Bank of England Chief Economist Huw Pill said on Friday that there was a risk of a gradual build-up of long-term inflation pressures in Britain's economy, driven by the jump in energy prices triggered by the war in Iran.

Pill, who on Thursday opposed the BoE's 6-3 majority decision to keep interest rates on hold, said it was good news that the surge in energy prices had not led to a "substantial deanchoring" of public trust in the BoE's 2% inflation target.

However, he warned it would not be possible to tell until later in the year whether "more slow-moving but maybe more insidious second-round effects" were developing as businesses and workers sought to recoup inflation-driven losses.

Governor Andrew Bailey said at his press conference on Thursday that the BoE was not edging towards a rate rise, despite support for keeping rates on hold falling to 6-3 from 7-2 in June after Catherine Mann joined Pill and Megan Greene in voting for a quarter-point rate rise.

Market pricing, which points to a rate hike later this year, reflected the risk of further escalation of inflation pressures from the U.S.-Iran war, rather than a view that the BoE needed to raise rates to control existing inflation, he said.

Trump's comments at the weekend about talks starting today between the U.S. and Iran could further alleviate any pressure for a hike, although market practitioners have ‘seen it all before’.

BP is putting its U.K. North Sea business up for sale, paving the way for the end of oil production in its home country after more than half a century.

BP published a press release on Friday saying it would market the business to potential buyers as it refocuses spending on higher-return projects elsewhere.

The move comes as new Chief Executive Meg O’Neill reviews BP’s portfolio in a strategic shake-up designed to boost profit and shareholder returns. The company is targeting $20 billion in asset sales by the end of 2027 to cut net debt.

BP’s share price and profitability have lagged peers in recent years, in part due to an ill-fated push into green energy, and the company is attempting to catch up by spending more on its core oil-and-gas business.

O’Neill said on Friday that, as BP directs spending towards its highest-value opportunities, its North Sea business may be better positioned within another company.

The assets BP is putting up for sale include five production hubs off the east coast of Scotland and west of the Shetland Islands. The business employs around 1,100 people.

Chancellor John Healey told reporters last week that he would deliver his budget to Parliament on 26th October. This is likely to mark the end of Andy Burnham’s ‘honeymoon period’. It appears the Government's spending and taxation plans will be more of a joint effort under the new regime, since Rachel Reeves appeared to be ‘left to her own devices' under Starmer.

Sterling showed a mixed but slightly positive performance in FX markets last week, with clear strength against the US and Canadian dollars, but notable weakness against the yen and Scandinavian currencies.

The US Federal Reserve is facing a credibility crisis as investors question whether its new Chairman will raise interest rates under Donald Trump’s Presidency. Kevin Warsh risks being seen as a Chairman who ‘talks a good game’ but, when the chips are down, knows ‘on which side his bread is buttered’.

Investors warned that Kevin Warsh’s sparse communication and his unwillingness to say he would use interest rates to quell inflation have spooked US bondholders.

The cost of long-term US debt rose to the highest in nearly two decades at the end of last week after Warsh said he would provide no “forward guidance” to investors about the path of interest rates. The yield on 30-year US bonds hit 5.22%, the highest since 2007, after Warsh’s second press conference as Fed chairman. It was the biggest one-day bond sell-off since Trump’s “liberation day” tariffs in April last year.

Traders pointed to Warsh’s vague comments about the need to raise interest rates to get inflation back to the Fed’s 2% target, at a time when energy prices are expected to push up prices in the world’s largest economy. “Markets are beginning to question the Fed’s credibility,” several market sources concluded.

The new Fed Chair has ceded any semblance of control of the bond markets, but he intimates that this is his intention. He feels that the Fed should be the referee, not one of the principal players, in market volatility.

Warsh floated to colleagues this week the prospect of the FOMC meeting less often, which would mark a substantial shift in its operations.

He presided over his second meeting of the 12-person Federal Open Market Committee last week. The committee convenes in Washington eight times a year to determine the level of official interest rates. The idea of fewer meetings was presented as a subject for discussion rather than a formal proposal, and a brief discussion centred on whether there would be benefits to meeting six times a year.

The idea offers a window into the Fed that Warsh is trying to build, one that speaks less often and commands less of the market’s attention. In his first two meetings as Chairman, the committee has issued a shorter statement. Last week, Warsh said he expected to continue holding a press conference after every meeting this year; he hasn’t said whether that will continue after that.

Goldman Sachs Research doesn’t expect the Federal Reserve to cut rates until 2027. David Mericle, chief US economist, has pushed his projection for the final two rate cuts in this cycle to June and December 2027 (from December 2026 and March 2027).

US economic activity and labour market data “have been stronger than we anticipated in recent months, with job growth in particular picking up impressively,” Mericle writes in a report.

Goldman still expects GDP growth to be somewhat below potential in the second half of this year, as higher oil prices weigh on spending. But it now expects the unemployment rate, which stood at 4.3% in May, to rise only slightly this year to 4.4%, down from a previous forecast of 4.6%.

The latest jobs data will be published later this week.

The U.S. dollar ended the week lower, with declines against most major currencies. The move was broad but not dramatic, driven by softer U.S. macro data and recalibrated Fed expectations. High‑beta currencies (NZD, AUD, GBP) led gains, while the JPY outperformed sharply.

The ECB last week unveiled the accessibility features planned for the digital euro, saying its platform will exceed European Union accessibility standards ahead of pilot testing scheduled for 2027.

The app will provide users with access to basic digital euro services and has been designed with accessibility and inclusion as core principles from the outset, reflecting the ECB’s aim to ensure that every European can access digital payments on equal terms, regardless of their needs, abilities or level of digital confidence.

According to the ECB, the proposed design includes best-in-class accessibility features that go beyond the requirements of the European Accessibility Act and the related official standard, placing the app among the most advanced currently available on the market.

The Central Bank said this approach underlines the Eurosystem’s commitment to inclusion and to ensuring that the digital euro is accessible to everyone.

Among the proposed features are enhanced visual design, full keyboard navigation, screen reader support, time-out warnings, simplified language, error-prevention measures, and reduced motion settings, all intended to address common barriers faced by users with diverse accessibility needs.

“Like cash, the digital euro will be a public good, and in the digital age, every European should be able to access it on equal terms,” said European Central Bank Executive Board member Piero Cipollone, who chairs the High-Level Task Force on a digital euro.

“We support the European Commission’s legislative proposal, which would ensure that everyone has access to the digital euro app,” he stated.

This week brings a wealth of data from individual Eurozone nations and the ECB for the region as a whole.

Today, Germany will publish retail sales, while Italy and Germany will unveil manufacturing PMIs, alongside similar data for the entire Eurozone.

Tomorrow brings Spanish employment data and Italian retail sales. Services PMIs for the entire region will be released on Wednesday, accompanied by French industrial output.

The ECB will release its monthly economic bulletin on Thursday. This will summarise the Central Bank's view of the Eurozone's development over the rest of the third quarter.

Finally, on Friday, while the market awaits the U.S. NFP numbers, Germany will publish industrial production data. This will confirm, or otherwise, the optimistic comments recently made by the German Chancellor.

Rumours are beginning to circulate again about whether Christine Lagarde intends to fulfil her full term as President of the European Central Bank. It seems she feels almost obliged to play a major part in France’s Presidential election, which takes place next April.

The euro posted a broadly positive week, outperforming most G10 currencies except JPY, SEK, and NZD. Gains were strongest against USD and CAD, reflecting a combination of USD softness and stable Eurozone data, even as ECB policy expectations remained cautious. The Fed's hesitation to hike rates also supported the single currency.

Have a great day!