10 July 2025: Reeves’ Mansion House Speech will be a dour affair

Bank of England Governor Andrew Bailey sees the lingering effect of Donald Trump’s trade policies as being sufficiently disruptive to the global economy, making the chances of significant interest rate cuts this year unlikely.

Although there may be a loosening of monetary policy later in the year, it is unlikely to be of the same magnitude as seen in the Eurozone. Additionally, Bailey believes that the size of easing seen in Europe may prove unnecessary in the UK.

The Bank of England will take account of the rise in yields on longer maturity government bonds as it considers how far to reduce its portfolio of gilts over the coming year, Gov. Andrew Bailey said yesterday.

Like other central banks, the Bank has been reducing the portfolio of government bonds it acquired as a result of its efforts to boost the economy through a policy known as quantitative easing.

However, unlike many other Central Banks, the BOE has chosen to do so partly by selling bonds, rather than waiting for them to mature. Some critics of that policy believe it has contributed to higher borrowing costs for the government, businesses and households.

Speaking to reporters at the launch of the Bank’s twice-yearly report on financial stability, Bailey said policymakers will consider the global rise in yields on longer-term bonds when deciding how much further to go in the 12 months from October.

“We’ll have to look carefully at how that plays into our decision,” he said. “It’s an open decision.”

Last September, the BOE decided to reduce its bond portfolio by 100 billion pounds over the next 12 months. In the first three months of this year, that involved the sale of 2.8 billion pounds in government bonds, while 29.2 billion pounds in bonds matured, reducing the overall size of the portfolio to 623 billion pounds.

However, a decision to stick to that same goal in the next 12-month period would require further significant sales of government bonds at a time when the U.K. government is also having to borrow more heavily than it had anticipated. That could keep borrowing costs higher than they otherwise would be.

Next week’s Mansion House Dinner comes amid a bit of a rethink in relations between Westminster and the City of London. Many in finance had welcomed the Labour government as a return to policy competence and fiscal orthodoxy, with Rachel Reeves seen as the responsible grown-up who recognised that the only way out of the UK’s fiscal hole was a pro-business, pro-growth agenda.

The air of positivity has slipped considerably in the intervening year. The U-turns on the winter fuel allowance and disability benefits show backbenchers flexing their muscles and Sir Keir Starmer accommodating them.

The mood in the City is still mildly positive towards Reeves. This will make her feel safe delivering her speech next week.

She has been praised by large institutions for securing concessions from President Trump in his “Big Beautiful Bill”, which could have almost doubled taxes on US offshoots of British companies, including Barclays Bank. Lloyd’s of London, the insurance market, also cheered the move.

The pound again threatened its short-term level of support yesterday, falling to a low of 1.3546, but like the day before, saw some buying emerge close to that level, leading to a close at 1.3583, just 13 points down on the day.

“One or two officials” at the Federal Open Market Committee’s June 17-18 meeting expressed the view that interest rates may be cut as early as this month, while the majority of policymakers shared Jerome Powell’s concerns regarding the inflationary pressures anticipated from President Donald Trump's implementation of import taxes aimed at altering global trade, the minutes of the meeting noted.

There was little likelihood of any significant news emerging from the publication of the minutes, since a plethora of regional Fed Presidents and Governors had already given their spin on the meeting.

The Minutes released yesterday indicated that "most participants" at the meeting anticipated that rate cuts would be appropriate later this year, noting that any price shock from tariffs was expected to be "temporary or modest."

A new report from the White House Council of Economic Advisers found that prices for imported goods have dropped in the first five months of the year, even though overall goods prices have risen in the same period, challenging the notion that President Donald Trump’s tariff policies are fuelling higher inflation.

This may be so currently, but the real story will only emerge after the current pause in the imposition of tariffs ends next month.

Trump has “weaponised” the use of tariffs, way beyond his claim that the U.S. is, and has been for several years, being taken advantage of by its trading partners.

For example, yesterday, he threatened the Brazilian government of President Luiz Inácio Lula da Silva with 50% tariffs on its exports to the U.S. over its treatment of Jair Bolsonaro, the former leader who is on trial on accusations that he tried to overthrow the government.

Trump has said the prosecution of Bolsonaro is a “witch hunt” and has compared Bolsonaro’s case to his own. Trump faced Federal and State criminal charges in four cases before returning to the White House.

It is emerging why Trump is constantly critical of the Fed’s actions in leaving rates unchanged. He wants to reduce the amount of money that it costs to finance the size of the Federal Debt, and one way to do that is for rates to be lower. This is a ploy to make him seem to be reducing the size of the Government, without actually doing so.

The Greenback paid little attention to the release of the FOMC Minutes, with the US Dollar Index hovering around the 97.50 zone amid marginal gains and following investors' caution after President Trump's threats of further tariffs.

The current pause in European Central Bank rate cuts could be long-lasting unless economic data worsens, in which case there could be further rate cuts this year, policymaker Robert Holzmann told Austrian broadcaster ORF on Monday.

"It could be that the pause lasts a while," he said when asked if there would be further rate cuts this year, adding each rate decision was based on the data available at that time. "If economic developments worsen, there could be further interest-rate cuts."

Holzmann has had a long-term habit of pre-empting the decisions of the ECB’s Governing Council. A decision on a pause in rate cuts will only happen at the next Council meeting. There have been as many hints of another cut as there have been about a pause.

Holzmann did at least temper his hawkish rhetoric by acknowledging that the decision on a pause will be “data-dependent”.

Climate disasters such as droughts, wildfires, floods and storms could slash up to 5% off the eurozone's GDP by 2030, economists warned Wednesday in an ECB blog post.

Under a severe scenario, the 20-member (soon to be 21-member) Eurozone would suffer an economic hit not only from a series of natural hazards at home but also those abroad that would hit its supply chains.

The total shock could be "a downturn similar in magnitude to the economic impact of the Global Financial Crisis", the blog post said, warning that climate change was no longer a theoretical risk but "an imminent danger". The scenario is not billed as a forecast but a plausible warning of what could happen within the next five years, with the modelling including weather events that could be expected once every 50 years.

Under the most severe scenario, dubbed "Disasters and Policy Stagnation," Europe would face back-to-back waves of extreme heat, droughts and wildfires starting in 2026, as well as destructive floods and storms.

There have been several examples of what to expect, including the severe flooding in parts of Spain that occurred earlier this year. The ECB post discusses the prospect of such events happening one after the other, or even simultaneously.

The Euro is entering its annual news blackout as politicians and bankers prepare to leave their offices for their holidays on the beaches of the Mediterranean. It is already trading in noticeably narrower ranges. Yesterday, it traded in a 36-point range, closing at 1.1721.

Have a great day!