11 July 2025: Bailey and Reeves are on a collision course

The triple lock on the state pension will be under severe threat when the Chancellor of the Exchequer delivers her Budget in the Autumn

The way the economy has developed since 2010, when the triple lock was introduced, has resulted in the scheme becoming far more expensive than it was intended to be.

The two major U-turns that the Government has performed over the past few weeks mean that tax increases have become inevitable later in the year.

The Prime Minister clashed with the Leader of the Opposition in Parliament earlier this week when the possible introduction of a wealth tax was discussed. When pressed by Kemi Badenoch, Sir Keir Starmer refused to rule out the measure.

More than 370 pubs are set to close this year. Industry bosses have warned the Government's “tax raid makes it impossible to make a profit” with the hospitality sector calling on ministers to tackle “eye-watering” costs.

The British Beer and Pub Association, which represents more than 20,000 pubs in the UK, said it expects 378 to close this year in England, Scotland and Wales, at a cost of 5,600 jobs. This would mark an increase from the 350 that closed their doors for good last year.

The hospitality sector has suffered more than any other since the pandemic, although the writing was on the wall long before that. Rishi Sunak recognised the issue when he introduced the ill-fated Eat Out to Help Out scheme following the COVID-19 lockdowns.

The health and benefits sectors are set to cost £100 billion by the end of this Parliament. This is the equivalent of the total tax burden on almost nine million workers.

When Labour backbenchers forced the Government to abandon plans to tighten eligibility for personal independence payments and the health-related element of Universal Credit last Tuesday, they avoided a potential Commons defeat which would have been unprecedented for a Government with such an overwhelming majority.

The retreat cost £5 billion in lost welfare savings, adding to the mounting benefits bill. Prime Minister Keir Starmer's concessions mean taxpayers face an even greater burden than initially forecast.

Chancellor Rachel Reeves now faces pressure over her self-imposed fiscal rules and manifesto pledge not to raise taxes on "working people".

The entire social element of government expenditure and how it is funded is set to become a major discussion point in the House of Commons, particularly following the revelation that the Prime Minister has lost control of his backbenchers.

Bank of England Governor Andrew Bailey is considering a major intervention in policy, saying that he does not agree with plans that are currently under discussion by MPs for pension funds to invest in more UK assets.

It sounds like the “thin end of the wedge” for the Government to say that it does not intend to use the power, since it is only designed to be a backstop. These often hidden clauses have a habit of becoming significant “planks of policy.”

It would make it extremely difficult for Ms Reeves to implement such plans if it became evident that the Head of the Central Bank opposed them.

The pound has lost ground on seven of the last eight sessions. Yesterday, it fell to a low of 1.3533 and closed at 1.3568. The short-term support between 1.3520 and 1.3530 has so far remained intact, but the more sellers emerge, the more likely it is to be breached, which would open up further weakness.

The “dot plot” delivered as part of the minutes of the latest FOMC minutes suggests that rates will be cut twice before the end of the year. The dot plot is a visual representation of where top Fed policymakers think the key federal funds rate is headed. The Fed has published the dot plot quarterly since 2012 as part of its drive toward transparency.

Federal Reserve Governor Christopher Waller said yesterday that the Fed still has some way to go in shrinking the size of its balance sheet, in comments that offered a potential resting size for the ongoing drawdown, while reiterating the case is still there to cut the central bank's interest rate target later this month.

Given the likely level of bank reserves, the financial system needs to be at "ample" levels. Waller said the Fed can likely allow bonds it owns to mature and not be replaced "for some time, reducing reserve balances." His comments came at an event held by the Dallas Fed.

Against a Fed balance sheet that now stands at $6.7 trillion, with $3.3 trillion in bank reserves, Waller said the ongoing effort to reduce the holdings may have a visible target in view.

He noted that money market turbulence in late 2019 suggests a drop in reserves to below 8% of GDP is an issue, so that metric helped inform his rough estimate of where overall Fed holdings might need to fall.

Meanwhile, Federal Reserve Bank of San Francisco President Mary Daly spoke of the progress the U.S. is making toward price stability, while expressing confidence that inflation is on a sustainable path down to the Fed’s 2% target.

When asked about tariffs, Daly indicated she would be concerned if tariff impacts spread beyond imports to other sectors of the economy. She observed that importers and retailers are currently absorbing some of the tariff costs rather than passing them fully to consumers.

Daly also suggested that potential tariffs might not drive significant consumer price increases, alleviating some inflation concerns.

Looking ahead to monetary policy, Daly agreed that two interest rate cuts in 2025 would be the likely outcome.

The dollar index has begun to mount a tentative recovery from its extended correction since the middle of Q1. Any perceived strength would be subject to any further pronouncements from President Trump, although the market and the Fed have both had time to analyse the likely economic effect of the proposed tariffs.

The index reached a high of 97.92 yesterday but trimmed its gains later in the day to close at 97.59.

The Eurozone economy needs officials of the ECB and beyond to recognise that threats to growth are not solely encapsulated within the war on inflation.

As that battle has apparently been won, there are other issues that have been somewhat ignored despite the 200 points of rate cuts that have transpired over the past year.

Eurozone data remains volatile amid trade war developments, but the underlying trend is still sluggish.

There are rumours that an agreement will soon be announced between the European Union and the United States over trade. One of the major reasons President Trump announced his plans for tariffs last April was to try to get the Eurozone to import more American goods, while trying to encourage American consumers to “buy American.”

One sector that Trump has blatantly ignored is the auto sector, where simply saying that American products, especially in the luxury vehicle sector, are comparable to European models simply does not stack up.

Germany’s exports fell for a second straight month in May in response to higher U.S. tariffs as Europe’s largest economy looks set for another year of little or no growth.

Goods exports declined 1.4% on the month, dragged lower by exports to the U.S. that slumped 7.7%, Germany’s statistics agency Destatis said earlier this week.

The value of exports to the U.S. fell to 12.1 billion euros, the lowest value since March 2022, Destatis noted.

Despite the slump, the U.S. remains the largest destination for German goods exports. U.S. tariffs on European Union products, currently at 25% for autos, 50% for metals and 10% for most other goods, have already sent exports across the Atlantic falling by around 10% in April.

“The risk of more tariffs hangs like a sword of Damocles over German and European exporters,” Carsten Brzeski, ING’s head of macro research, said in a note to clients.

R&D and product development in the European Community cannot afford to be placed on hold for any significant amount of time, since companies run the risk of missing important trends in the market.

Export business has been key to Germany’s economic strength, driven by the country’s car factories, pharmaceutical manufacturers and propelled by cheap pipelined gas from Russia. But the full-scale invasion of Ukraine forced energy costs painfully higher, exacerbating already present concerns that included a more competitive China and a difficult green transition.

“The German economy faces significant headwinds in the short term,” the central bank’s President Joachim Nagel said in a speech on Monday.

In his speech, Nagel addressed the ECB’s original monetary policy strategy, which has undergone significant reviews. The most notable of these was in 2021, when the ECB introduced a symmetric 2 % inflation target, treating both upward and downward deviations as equally undesirable.

The Euro is in a developing downtrend as its overbought state has led to traders exiting long positions and considering remaining neutral until the tariff issue is settled.

Yesterday, the single currency fell to a low of 1.1662 and closed at 1.1700.

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