10 June 2026: Burnham to outline policing plans

The Bank of England risks its credibility if it fails to act over the coming months to bring inflation closer to its 2% target.

This will mean that interest rates will need to be hiked at least once, so the question for Andrew Bailey and his colleagues is: when will conditions be right for a tightening of monetary policy?

Bailey is delaying the inevitable by telling the markets that 1) guiding that any thought of a rate cut is off the table is tantamount to a single rate increase, and 2) the MPC wants to be certain that inflation is “bleeding” into second-round effects before hiking.

Prices have been rising above the Bank’s 2% target for well over a year; despite the war in Iran, the MPC should be considering a rate hike in any event.

Bailey has said on several occasions that, were it not for the conflict, he would have expected inflation to be challenging the 2% level by now, but, unfortunately, reality has intervened. Prices are still rising at an average of 3% or more.

When oil prices began rising earlier this year, it was hard not to feel a horrible sense of déjà vu. The last major energy price surge in 2021 helped usher in double-digit inflation and more than five percentage points’ worth of interest rate hikes.

When conflict erupted in the Middle East at the end of February, markets (fearing history repeating itself) rushed to price in steep rate hikes. Three-and-a-half months later, it’s clear that some things are different this time around.

Oil prices might be close to 2022 levels, but natural gas, which makes up almost 40 percent of the UK’s energy supply, remains around 80 percent below its 2022 peak. The economy is also on a very different footing from four years ago.

The country is no longer riding a wave of pent-up post-lockdown demand, and unemployment is behaving very differently from how it did during the last energy jump. This should help limit the strength of any ‘second-round’ effects.

Second-round effects occur when workers and firms respond to rising prices by demanding higher wages and input costs, further increasing inflationary pressure. In their presence, even a modest shock can translate into a high inflation rate as a wage-price spiral takes hold.

In a weaker labour market, there is less risk of the cycle taking off. Workers lack the bargaining power to secure higher wages, and weaker demand leaves firms with less scope to pass on higher costs to customers.

In a speech at the end of May, Bailey said that “continued weakness in UK activity and the labour market is likely to reduce the strength of second-round effects from higher energy prices”.

The longer the conflict drags on, the riskier it becomes to stay on hold. Rate-setter Megan Greene (who last Thursday signalled she is open to voting for a hike) warns that “we cannot rely on the tightening of the yield curve to do our work for us; absent a hike in Base Rate soon, the curve will likely fall”.

Expectations are also a concern. Inflation has now been above target for seven of the past 10 years. Greene warns that this could leave businesses and households more sensitive to rising prices – and quicker to respond with wage and price demands. “The risk of acting, even if inflation proves to be less persistent, is less severe than the risk of failing to act,” she said. Several rate-setters on the committee share her hawkish outlook.

There is one more question: is the target correct? The Federal Reserve and the ECB have a 2% inflation target, but their economies are vastly different from the UK’s. Given the record on inflation over the past ten years, would it be better to “move the goalposts” than try to achieve, if not the impossible, then the “highly unlikely”

Andy Burnham’s make-or-break by-election is just over a week away, prompting questions about what the UK might look like with the popular northern Mayor as the next leader of the Labour Party.

On 18 June, voters in Greater Manchester’s Makerfield will go to the polls to elect a replacement for departing Labour MP Josh Simons, who stepped aside in May to allow Burnham to run. Some may argue that Mr Simons' decision has diminished the value of being an MP.

The Mayor of Manchester has confirmed his intention to contest any Labour leadership election, challenging Sir Keir Starmer if he returns to Westminster. An MP from 2001 to 2017, holding three ministerial positions in that time, the Liverpool-born politician will be familiar with the move to London, but the circumstances will feel very novel.

It is hard to gauge the views of the Labour rank and file on Burnham being cast as the Party’s saviour. Imagine if he failed to win the by-election!

At the heart of Mr Burnham’s plan for Britain lies ‘Manchesterism’, a political vision that, in short, brings together elements of devolution and nationalisation.

Informed by his time as Mayor of Manchester, Burnham has called for greater powers and funding decisions to be given to regional leaders, who are best placed to understand their communities' needs.

This often includes the power to control public services, as exemplified by Manchester’s successful ‘Bee Network’. Comprising bus and tram routes across the city, the scheme's development saw the infrastructure's ownership wrested from several private companies, giving local decision-makers full control.

It remains to be seen whether this policy will transfer from the local to the national government.

The pound climbed to a high of 1.3411 yesterday and closed at 1.3381 as market demand for the higher-yielding pound increased.

Donald Trump has made no secret of his hope for early interest rate cuts from Kevin Warsh, the Federal Reserve’s new chairman. This sets Trump up for deep disappointment. It is not only that Warsh lacks the necessary votes on the Federal Reserve’s Open Market Committee (FOMC) to cut rates. It is also that Trump’s war of choice in Iran, coupled with his reckless budget and import tariff policies, offers strong arguments against the appropriateness of an interest rate cut at this juncture.

Start with the fact that there are twelve voting members on the FOMC, of whom Warsh has only one vote. At its last meeting, many FOMC voting members wanted to remove the “easing bias” language from the Fed’s last interest rate decision.

Since then, a majority of FOMC members have indicated that the Fed may need to raise interest rates later this year if inflation does not cool to the Fed’s 2% inflation target. This makes it highly unlikely that, even if he wanted to do Trump’s bidding, Warsh will be able to convince his fellow FOMC members to cut interest rates until there is clear evidence that inflation is coming down.

The key reason that most FOMC participants think that an interest rate hike might be warranted later this year is that inflation is currently running at 3.8%, close to double the Fed’s inflation target. At the same time, unemployment, at 4.3%, remains close to its historically low level.

One important factor driving inflation higher has been the spike in gasoline prices from less than $3 a gallon at the start of the Iran war to around $4.25 a gallon. Other factors have been the hike in import tariffs to their highest level in 100 years and Trump’s large, unfunded tax cuts in his One Big Beautiful Bill Act.

According to the Congressional Budget Office, those tax cuts will keep the budget deficit at over 6% of GDP as far as the eye can see. They will also soon raise the public debt level relative to the size of the economy to its highest level since the end of the Second World War.

Needless to say, Trump will soon lose patience with Warsh if he does not deliver interest rate cuts. We have to hope that Warsh displays the same courage as Jerome Powell did in refusing to bend to Trump’s unrelenting pressure for interest rate cuts. If not, we should brace ourselves for another burst of inflation.

The upcoming June Federal Reserve meeting will be a major test for incoming chair Kevin Warsh on interest-rate policy. It could trigger market volatility, according to Deutsche Bank’s head of FX research, George Saravelos.

"The market will test Chair Warsh; it will test his credentials, and we could potentially see quite a lot of volatility," Saravelos said in an interview with Bloomberg TV.

Warsh will lead his first meeting and press conference next week, having taken over from Jerome Powell.

The key question of whether US interest rates are restrictive enough is the "big debate at the moment" as growth remains solid, inflation accelerates, and fiscal policy eases.

The dollar index is facing a “too high to buy” scenario as it approaches the 100 barrier. Traders are shying away from buying the dollar because the fundamental pillars that normally support USD demand have weakened, while the forces that usually push investors into the dollar are fading.

Yesterday, the index fell to 1 low of 98.68 but recovered to close at 99.95.

An ECB rate hike brings a clear inflation-versus-growth dilemma, and the latest reporting makes that tension explicit. The bank is preparing to tighten policy because inflation is proving sticky, even as Eurozone growth weakens sharply. This is not a theoretical dilemma; it is visible in the data and in policymakers’ own language.

The ECB feels compelled to hike: inflation pressures remain too strong.

Recent Eurostat data shows inflation accelerating to 3.2% in May, driven by energy costs up 10.9%, services inflation rising to 3.5%, and core inflation picking up to 2.5%.

This is exactly the kind of broadening inflation the ECB worries about. Policymakers have already signalled that higher inflation justifies a rate increase, and markets have fully priced in a 25 bp hike. Even dovish voices acknowledge the need to act.

However, growth is deteriorating, and that’s the dilemma

Multiple indicators point to a weakening euro-area economy: PMI surveys and ECB data show mounting pressure on the real economy, high energy prices continue to weigh on industry, and the Iran-related energy shock is weighing on growth

Several media outlets have noted that policymakers are “walking a tightrope”, trying to contain rising prices without further undermining growth.

The bloc is already weaker than during the 2022 energy crisis, making aggressive tightening riskier.

The ECB is balancing two risks; the first is to its credibility. Under Christine Lagarde’s Presidency and that of Mario Draghi before her, the ECB has built a reputation for following through on its promises, particularly regarding inflation. Tomorrow’s probable rate hike has been labelled as a risk-management exercise in Frankfurt. Even the most dovish of Governing Council Members have bought into this theory.

It is expected that the rise in rates will be limited to one or, at most, two hikes.

The German economy saw a slight increase in exports in April, despite the war in Iran. Exports were up 0.9% in March, according to the Federal Statistical Office in Wiesbaden, based on provisional data.

Exports also rose by 3.6% compared with the same month a year earlier. The figures have been adjusted for calendar and seasonal effects. Imports grew by 1.2% in March and by 6.2% in April 2025.

In April, the total value of exports was 136.6 billion euros, while goods worth 122.1 billion euros were imported into Germany. This resulted in a trade surplus of 14.5 billion euros, down from 14.7 billion euros in March.

The USA remained Germany's most important export market in April, with goods worth 11.4 billion euros exported to the United States.

The Euro has now regained most of the ground lost last week as investor confidence grew more than expected this month. It reached a high of 1.1578 but settled back, closing at 1.1542.

Have a great day!