12 December 2025: Reeves’ questioning rumbles on

Bank of England Governor Andrew Bailey has expressed concerns about the proliferation of private credit arrangements, which in some cases have replaced “traditional” financing. He is primarily concerned about the market's unregulated nature, which could destabilise it should funding become an issue.

Nonetheless, he also believes that by its very nature, this market should be less stringent in its regulation than more conventional methods.

Regulation of the booming private credit sector should be more light-touch than traditional lenders, despite the Central Bank’s fears that a blow-up of the industry remains one of the most significant threats to UK financial stability.

Bailey told an online event that the fallout from a banking collapse would have a far greater impact on the overall economic conditions of the UK than its private credit equivalent, and that, as a result, they should “regulate them differently”.

The comments from the Bank’s Governor follow a period of heightened scrutiny on the private credit industry, or shadow banking, as it is often known, after a string of high-profile corporate collapses linked to the industry sparked fears of a sector-wide downturn.

For many years, the UK has been considered a low-growth economy, even before Brexit closed off access to the lucrative European Union’s markets.

AI could play a significant role in boosting the UK’s low-growth economy, but it is not a silver bullet. It offers enormous potential for productivity, innovation, and GDP growth, yet challenges around skills, infrastructure, and uneven adoption mean it must be part of a broader economic strategy. AI adoption is already reshaping the labour market. Business restructure firm McKinsey notes that job adverts have declined most in occupations highly exposed to AI, raising concerns about displacement, especially for younger workers.

AI is a powerful lever for growth, but it must be integrated into a wider economic plan. If the UK invests in skills, infrastructure, and inclusive policies, AI could help transform its low-growth trajectory into a more dynamic, innovative economy.

One of the central pledges of the Labour Party’s 2024 manifesto was not to raise taxes on “working people”. In the Budget on November 26, Chancellor Rachel Reeves did not raise taxes in any obvious way that would constitute a clear breach of the manifesto. But she did freeze personal tax thresholds until 2031.

The freezing of both income tax and National Insurance contributions is expected to raise £8.3 billion by 2029–30, according to the Institute for Fiscal Studies.

That extra revenue is the equivalent of raising the basic rate of income tax by 1p.

Income tax and NIC thresholds would typically increase in line with CPI, to ensure that taxation keeps pace with the real economy. Therefore, if the Chancellor freezes the threshold at which we begin paying tax, rising inflation and wages mean that more people are drawn into higher tax bands.

It is irrelevant what Reeves intended by freezing personal tax thresholds, but since “ordinary working people” will be paying more tax going forward, it is how they interpret the Budget speech that determines whether they believe they were misled. Unless there is a radical overhaul in how the welfare system is funded, voters will have to make their minds up, since Reeves may well be back for more of a slice of national income going forward.

The pound extended its gains against the U.S. dollar yesterday. It rallied to a high of 1,3428 but ran out of momentum as traders remembered the likelihood that the MPC is expected to cut rates itself next week, leading to a return close to its close in the previous session.

Following its reduction in the target Fed Funds rate earlier this week, the Federal Reserve signalled that rates may be unchanged for several months. This is not simply the view of Fed Chair Jerome Powell, since his statement, approved by the entire committee, would mark a significant milestone, despite the committee's members contributing to its most fractured state for many years.

Powell suggested at his news conference that after six rate cuts in the past two years, the Central Bank can step back and see how hiring and inflation develop. In a set of quarterly economic projections, Fed officials signalled they expect to lower rates just once next year.

Fed officials “will carefully evaluate the incoming data,” Powell said, adding that the Fed is “well positioned to wait to see how the economy evolves.”

Powell believes that the Fed’s key rate is close to a neutral level that neither restricts nor stimulates the economy. This is a significant shift from earlier this year, when he described the rate as high enough to slow the economy and quell inflation. With rates closer to a more neutral level, the bar for further rate cuts is likely higher than it was earlier in the year.

Three committee members dissented from the move, the most in six years and a sign of deep divisions on a committee that traditionally works by consensus. Two officials voted to keep the Fed’s rate unchanged: Jeffrey Schmid, President of the Kansas City Fed, and Austan Goolsbee, from Chicago. Stephen Miran, whom Trump appointed in September, voted for a fifty-point cut.

Several economists and market analysts believe that the Fed’s confidence that it won’t be required to cut rates again until late Spring at the earliest shows a level of confidence in the economy, particularly the employment sector, that is at odds with President Trump's view.

This view may be rendered academic since a new Fed Chair is about to be appointed, who will be mandated by the President to preside over a series of cuts to lower official rates close to 3%.

The US recorded a trade deficit of $52.8 billion in September 2025, the lowest since June 2020, compared to a $59.3 billion gap in August and forecasts of $63.3 billion. Exports jumped 3% to $289.3 billion, led by non-monetary gold, pharmaceutical preparations, and financial services, while sales of computers, travel, and transport declined.

Meanwhile, imports rose at a slower 0.6% to $342.1 billion, led by a surge in pharmaceutical preparations and an increase in non-monetary gold, computer accessories, transport and financial services, while purchases declined for computers, crude oil, electric apparatus and travel.

Trade used to be the most-watched monthly data release, but it was usurped many years ago by the job figures. Yesterday, the dollar index lost more ground despite the relatively hawkish nature of the Fed’s statement regarding future rate cuts. It fell to a low of 98.14 and closed at 98.26.

Questions are being asked: Why would the European Central Bank’s German representative promote a hike in interest rates when the euro bloc's biggest economy has been in recession for the last two years?

Isabel Schnabel is "rather comfortable" with the futures market anticipating that the ECB will tighten monetary conditions as its next move. That would risk making a significant policy error, condemning the euro area to continued anaemic growth.

Schnabel sees upside risks to the economy and inflation, she said so in an interview in her Frankfurt office last week. That suggests next week’s quarterly review will show more optimistic growth projections. But markets have been fooled by false hope too many times. Instead, a more likely surprise might be that the ECB's initial inflation estimates for 2028 show further slippage beneath its 2% target.

The quarterly review is expected to predict continued flat growth and limited expansion. Eurozone-wide gross domestic product is forecast to grow by a little over 1% in 2026. The inflation outlook is similarly subdued, with the ECB’s favoured measure of five-year forward inflation swaps at 2.09%.

Even the Euro’s index value has flatlined since the summer, after a strong second quarter driven by Trump. It’s tough to see how a rate hike would help this economic malaise.

German manufacturing is sputtering again after only just emerging from a savage downturn. The government’s Council of Economic Advisers has revised its 2026 GDP estimate to below 1%, with this year barely scraping into minimal growth. There may be a lot of talk of fiscal stimulus from German and European Union rearmament measures, but most of that’s still a long way off.

France’s economy is set to rise and expand about 0.2 percent in the fourth quarter, down from 0.5 percent in the previous three months, questioning the budget next year, the central bank said. Its economy is growing modestly despite intense political uncertainty over the 2026 social-security budget, according to recent data and Central Bank surveys, which expect output to keep expanding into the end of this year.

It’s little surprise French President Emmanuel Macron repeated his call this week for a change to the ECB’s mandate to include growth and employment alongside consumer prices.

The Euro managed to break through the anticipated sell orders around the 1.1720 level, making a high of 1.1762 and closing at 1,1741. It remains to be seen if a lack of liquidity due to the impending Holidays proves to be a help or a hindrance to its progress.

Have a great day!