11 June 2026: The Bank of England warns of AI deepfake scams using Bailey’s video

The UK economy is expected to contract in the second quarter, despite a boost at the start of the year, with economists warning that the war in Iran’s energy price shock will now show up in fresh data.

Economists believe the UK economy declined by 0.1% in April. Official figures will be published tomorrow.

The deterioration in momentum will reflect the impact of the war in Iran on businesses and consumers, City analysts have said, as political uncertainty around the Labour Party’s leadership could also dampen activity.

Production and spending remain subdued as the energy shock catches up with households and businesses, causing some correction to growth across the country.

There is expected to be a small decline in the UK economy, though that outlook could be optimistic, as firms may pull back on spending more than expected.

Deutsche Bank commented that official figures last month showing a fall in retail sales by 0.4% will weigh on growth, while the services sector is also likely to decline after a “resounding start to the year”.

Strikes across the London Underground and some unseasonal weather would also have dampened activity.

A note by Pantheon Macroeconomics said that activity in the health sector could also decline due to doctor strikes in April. Scheduled resident doctor strikes taking place this month present “another downside risk” to growth forecasts for the quarter.

Analysts said that the 0.6% growth achieved in the first quarter of the year would unwind as firms stopped stockpiling in anticipation of further disruption from trade halted across the Strait of Hormuz.

Some have pencilled in a larger decline in growth due to weaknesses across the retail and communication sectors.

Business groups have now increased pressure on Rachel Reeves to fast-track growth policies, as questions persist about her future as Chancellor amid Andy Burnham’s possible leadership bid.

Reeves said in a speech on Tuesday that she would look to roll out AI adoption to boost productivity and grow the business, making it one of the key economic levers the Chancellor relies on to improve her political fortunes.

An AI adoption plan report, published alongside the speech, showed that a lack of skills and unclear regulations were the biggest barriers to taking on the technology.

A government review proposed pooling AI data and providing training for entry-level AI roles.

Businesses including HSBC, Rolls-Royce, Revolut, and Linklaters are set to provide data on AI adoption to an institute tasked with overseeing economic policy on the technology.

Meanwhile, the Bank of England has warned the public about scams after a fake video appeared to show Governor Andrew Bailey brawling with Reform UK’s Nigel Farage. The fabricated footage was linked to a fake BBC News page promoting a trading scheme that claimed to turn £250 into £1m in 11 weeks.

Farage confirmed the “bizarre AI videos” were fake; the Bank says impersonation scams are on the rise.

The Bank of England urged the public to be alert for scams after fake AI-generated videos and images circulated on X, purporting to show Governor Andrew Bailey in a physical fight with Reform UK leader Nigel Farage on television.

Sterling has experienced a rollercoaster week as conflicting economic stories drive trading. The escalation of tit-for-tat exchanges between the warring parties in the Middle East appears to be a prelude to a full-scale restart of the war in Iran. The pound fell to a low of 1.3367 and closed at that level.

A strange thing may happen in the coming days. Federal Reserve Chair Kevin Warsh may do exactly what his predecessor, Jerome Powell, did on interest rates, only to get a vastly different response from President Donald Trump.

Trump’s unexpected comments yesterday on the latest inflation figure may give Warsh some space on interest rates.

“I love the inflation,” he said in the Oval Office hours after the Bureau of Labour Statistics revealed that annualised inflation jumped by 4.2%. If the President is unconcerned about the highest inflation in three years, that may buy Warsh a reprieve from expectations to lower interest rates quickly. As with several loving relationships, one party fails to understand the other!

The President spent years railing against and trying to undermine Powell for what Trump saw as a stubborn refusal to cut interest rates faster and deeper than the Fed was willing to go. But now that Warsh has been confirmed as Chairman and faces his first rate-setting Fed meeting next week, Trump is starting to signal that he won’t object if Warsh doesn’t cut right away.

However, since Trump appears to separate inflation from lower interest rates, it may not be plain sailing for the new head of the Central Bank, although any rebuke may be significantly milder than after previous meetings, since the market is well aware that Warsh was Trump's pick for the job.

The conflict in Iran is now being called “Trump’s war” because its effects are causing consternation among various commentators on diplomacy and the economy.

Market odds overwhelmingly favour the Fed holding its short-term interest rate steady at 3.5%-3.75%, as it has since December. The war in Iran has, since March, pushed up energy prices, as tankers remain largely unable to transit the Strait of Hormuz chokepoint between the oil-rich Persian Gulf and the wider world.

That has prompted several Fed officials, including Dallas Fed President Lorie Logan and Cleveland Fed President Beth Hammack, to say recently that they would rather not cut rates now and, in fact, think increases might be in order this year.

The U.S. military said it launched another round of strikes against Iran after President Trump warned that Tehran would “pay the price” for stalled negotiations. The escalating attacks threatened to derail efforts to end the war.

U.S. Central Command said in a social media post that the military was striking “multiple targets in Iran,” adding that the attacks were “in response to Iran’s unwarranted and continued aggression.”

The second day of American strikes came hours after Bahrain, Kuwait and Jordan, all of which host U.S. troops, were hit by Iranian fire. It was the third time this week that back-and-forth strikes tested a two-month ceasefire. The strikes also came a day after the U.S. struck Iran following the crash of an Army helicopter near the Strait of Hormuz, which Trump blamed on the Islamic Republic.

Trump has urged Iran to sign a deal to end the war and suggested earlier this week that an agreement could be reached in a matter of days.

The dollar index rallied as tensions in and around the Strait of Hormuz escalated, heightening risk aversion. The index reached a high of 100.05 and closed at 100.04.

Sell orders remain around 100.20, but traders are waiting to see what happens over the rest of the week.

Any further escalation in the Middle East will encourage hawkish investors to take out those orders, pushing the index towards stop-loss levels around 100.50.

Today will be a day of nostalgia in the financial markets as the ECB returns to its old hawkish ways in response to rising inflation driven by higher energy prices, with the Strait of Hormuz remaining mostly closed due to the conflict in Iran.

The European Central Bank is all but certain to raise interest rates later this morning to curb higher inflation before a surge in energy costs triggered by the war in Iran spreads more broadly across the Eurozone economy.

The well-telegraphed move would come as inflation in the Eurozone is already above 3%, well in excess of the ECB's 2% target, even though economic growth is very weak, a backdrop that has economists split over the case for tighter policy.

ECB policymakers, some of whom had already pushed for action in April, are nonetheless expected to press ahead, seeking to keep a lid on inflation expectations and to safeguard their credibility after being slow to react to a post-pandemic inflation spike in 2022.

"They have to raise rates this time, simply to manage expectations," Richard Portes, a professor at the London Business School, said. "If they don't, the market's view will be that the ECB is willing to let inflation rip."

Today's hike would be the first in nearly three years, taking the ECB's benchmark deposit rate to 2.25% from 2.0%. Sources have told Reuters that the ECB is unlikely to commit to further rate rises this week, but financial markets expect two more over the next year, with the next move possible as soon as September.

ECB President Christine Lagarde will likely make a more hawkish speech following the Governing Council’s meeting later, as she will want the markets to be in no doubt about the seriousness of the Central Bank’s intentions.

Away from Frankfurt, on the periphery of the Eurozone, Spain’s GDP is forecast to grow by 2.1% in 2026, three times the forecasted rate for the wider euro area, according to Goldman Sachs Research. Since 2021, it has recorded the highest productivity growth on a per-employee and per-hour basis among the EU's four biggest economies.

Bond investors aren’t driving up yields on Spanish debt, even though the nation is spending more than other leading Eurozone economies to address soaring energy costs.

Rising energy prices may hurt air travel and tourism this summer and weigh on Spain’s GDP growth, but for now, the economy is basking in the sun.

The country is making progress across several fronts. Spanish unemployment has fallen to its lowest level since 2008, and the employment rate is at an all-time high. Productivity is growing faster than in the European Union’s three other major economies: Germany, France, and Italy.

While Spanish sovereign spreads have widened in tandem with broad-based inflation and slowing global growth, investors remain confident in the country’s domestic position.

The Italian economy is also standing in contrast to the gloom in the region’s two largest economies. Industrial output unexpectedly rose in April from the previous month; data published yesterday showed a 0.5% increase, marking the third consecutive gain for the manufacturing sector, which is showing signs of emerging from a long-running slump.

Industrial output rose 0.6% in March, amid surging energy costs following U.S. and Israeli strikes on Iran that began at the end of February.

The common currency weakened against a strengthening dollar yesterday. The Euro fell to a low of 1.1533 and closed at 1.1535. It remains to be seen whether today’s rate hike will have a significant positive effect, given that it has been well telegraphed to the market.

Have a great day!