11 June 2025: The Bank of England faces a complex monetary policy challenge

The employment data published yesterday added to the question of the Bank of England’s Monetary Policy Committee agreeing to another rate cut at its next meeting.

The UK has seen a significant drop in vacancies, and unemployment is rising, according to the latest job data from the Office for National Statistics, indicating an economic slowdown.

In the three months to April, unemployment rose to 4.6%, a three-year high. Estimates for employees between March and April were for a fall of 55,000. But there was a huge fall in employees of 274,000 year-on-year, according to an early estimate for May. Companies had warned that last year’s budget would increase employment costs, which could lead to a rationalisation of hiring policies.

Even before the increases to employer national insurance came into force, companies were paring back their hiring, trying to do more with fewer people whilst they figure out if they can pass on increased costs to inflation weary customers,”

Economic growth looks reasonable at first glance, but these new numbers reveal that a slowdown is already in progress. “Economic growth may be appearing robust on the surface through the first part of the year, but today’s labour market statistics highlight there is a slowdown well and truly underway.”

Now that higher national insurance contributions for businesses have been absorbed, companies are scaling back hiring and, in some cases, cutting their workforce significantly.

Santander last month announced it was cutting jobs and freezing salaries in its commercial banking arm. This illustrates the decisions that big companies are making at a time when an increased tax burden is being imposed upon them.

Wage increases are still well above inflation. Pay growth slowed to 5.2%, or 2.1% when adjusted for inflation, but will still be a concern for the Bank of England.

The economy will grow a mild 1% this year with the Bank of England set to cut interest rates two more times in 2025, according to economists polled by Reuters, little changed from previous projections despite tariff uncertainty.

Fundamentally, the growth forecast for 2025 is unchanged because tariffs won't have a huge impact on the economy. The car industry, steel, and pharmaceuticals are in the firing line, but as a proportion of GDP, UK goods exports to the U.S. are only about 2%.

Rachel Reeves will announce her spending plans for the next three years later today. The sense of anticipation has been lowered since she ensured that the “good news”, like the reversal of the changes to the pensioners’ winter fuel allowance, had been leaked in advance.

The pound began the day at 1.3463 yesterday, but rallied to a high of 1.3524 before settling back as day traders took profit on long positions, closing at 1.3500.

Donald Trump’s closest associates and members of his inner cabinet are calling for the President to remove the Chairman of the Federal Reserve from his position, accusing him of “political interference.” This contention seems to be driven by either a direct order from Trump himself or, more likely, a conscious decision to back the President “come what may.”

A growing chorus of advisers inside and outside the Trump administration is pushing another name to serve as the next chair of the Federal Reserve: Treasury Secretary Scott Bessent.

President Donald Trump said on Friday he would name a successor "very soon" to replace Jerome Powell, whose term as Fed chair ends in May 2026. The small list of candidates under consideration has included Kevin Warsh, a former Fed official whom Trump interviewed for the Treasury secretary role in November.

For now, Jerome Powell is in a tough spot on inflation and unemployment. He appears unperturbed about speculation about his job, preferring to concentrate on the job at hand.

Monetary policy works with long lags. Mr. Powell must choose between combating inflation and combating unemployment, given that President Trump’s tariffs could make either, likely both, worse.

Raphael Bostic, president and chief executive officer of the Federal Reserve Bank of Atlanta, wants us all to be patient when it comes to possible interest rate cuts in 2025. There's just a tad too many unknowns in the U.S. economy right now, including inflation numbers plus trade wars and tariffs, he said in an article published recently.

The Federal Reserve's dual mandate targets low inflation and unemployment. These goals are often at odds because higher interest rates lower inflation but increase job losses, while lower interest rates lower unemployment but increase inflation.

Post-pandemic, many express the same concern: interest rates on small business loans, consumer credit cards, and home mortgages are too high, but then so is inflation.

Market participants remain downbeat about interest rate cut chances, despite President Trump's multiple escalating demands directed at Federal Reserve Chairman Jerome Powell.

The May jobs data was slightly higher than expected but down from April. Unemployment is 4.2%, low historically, but up from 3.4% in 2023.

Short of a big uptick in unemployment, Fed watchers' attention is firmly on inflation. The Fed's unofficial goal is core inflation (inflation minus volatile energy and food prices) of 2%. PCE inflation is the Fed's favoured measure. In April, core PCE was 2.5%.

The dollar index is drifting currently as the markets await the next shock from the President. It remains broadly in a 99.40/98.80 range with traders slipping into holiday mode a little early this year.

The European Central Bank is "in a very good position" and can wait before having an in-depth discussion about an interest-rate move, according to Governing Council member Boris Vujcic. "By September, we're going to have three more rounds of data," the Croatian central-bank chief said during an interview.

Meanwhile, another Governing Council member, Yannis Stournaras, said the US’s unpredictable behaviour on tariffs is undermining the dollar’s status as the global reserve currency and is an opportunity for the Euro.

This is becoming a common theme for Central Bankers who feel that their work on monetary policy is close to completed, with interest rates having been cut by two hundred basis points recently, and now reaching 2%.

The US is turning global trade rules upside down by attempting to drastically reduce imports through tariffs,” Stournaras was cited as saying. In contrast, “the Euro area’s heads of state and government are committed to stability, free markets, democracy and the rule of law.”

The euro is supported by a politically independent ECB, which is committed to price stability and has demonstrated its credibility under adverse conditions and external shocks. According to Stournaras, Europe must work toward a “common fiscal capacity.”

For the position of the euro, it is also crucial that Europe be able to offer a common investment vehicle, “in simple terms, something that comes closest to European government bonds.”

Governing Board Member Isabel Schnable continued the theme, commenting that the European Central Bank can take its time on interest rates, with monetary policy now set at a neutral level that is no longer restrictive.

We have now reached neutral territory with our monetary policy and rates, which means that we are no longer restrictive, we can now take our time, since Inflation is now close to our target. We will also get there this year. All in all, this is good news as far as inflation is concerned.

Governing Committee members, Lane and Makhlouf, as well as Stournaras, will speak later today, and their newfound sense of unity will likely continue.

Eurozone investor morale rose to the highest level in a year in June, driven by the economic recovery in Germany, survey data from the research institute Sentix showed yesterday.

The investor sentiment index rose to +0.2 in June from -8.1 in May. This was the highest reading since June 2024 and remained well above economists' forecast of -6.0.

Sentix said the June data indicates an upturn in the European economic region. The improvement in the expectations indicator gives cause for hope, the think tank observed.

"Overall, the global economy is breathing a sigh of relief, even if the negative impetus following the US tariff shock has not yet been fully absorbed globally," Sentix said.

Assessment of the euro area's current situation as well as expectations strengthened in June, the Sentix survey revealed. The current situation index climbed to -13.0 in June from -19.3 in the previous month. The score was the highest since June last year.

Similarly, expectations advanced to 14.3 from 3.8 in May.

The euro, in keeping with other major currencies, remains hemmed in. Yesterday, it traded between 1.1378 and 1.1450, closing at 1.1420.

Have a great day!