12 February 2025: It seems a leopard can change its spots!

In a speech yesterday, the Bank of England Governor, Andrew Bailey, reiterated his view that there should be no lowering of regulatory standards simply to expand economic activity. Bailey is concerned that the government is considering undoing legislation that was brought in following the financial crisis (GFC), to cut “red tape.”

At the University of Chicago Booth School of Business, he said a “reaction took place against regulation and the responses to the GFC (global financial crisis).”

“We must not forget the lasting damage done by the GFC. There is no trade-off between economic growth and financial stability.”

The comments come weeks after the Prime Minister vowed to “clear out the regulatory weeds” to spur economic growth.

Sir Keir Starmer criticized the “morass of regulation that effectively bans billions of pounds” of investment in the UK, describing “thickets of red tape” that have spread through the economy.

The Government’s plans to cut red tape in the financial sector have included sending “growth-focused remit letters” to regulators and urging them to “tear down regulatory barriers”.

Bailey said the last 15 years had seen the “emergence of risks to financial stability originating in the non-bank system”, incorporating any financial institution that is not a bank.

These businesses must “manage the risks they face, and in some parts of the system it is appropriate that regulations are in place to provide more assurance of this management taking place”, the Bank chief said.

Nonetheless, he said there were typically choices for the country about how it deals with potential vulnerabilities in the system.

“It is critical that we have and develop tools of assessment and intervention. But these interventions may not always need to be more regulation,” he said.

Meanwhile, Catherine Mann, Bailey’s colleague on the Monetary Policy Committee, explained her recent 180-degree turn about interest rate cuts.

She argued that monetary policy needs to “cut through the noise” as she explained her decision to back a 50bps rate cut last week.

In a speech delivered in Leeds, she attributed her change in stance to the diminishing persistence of “embedded inflationary behaviours” due to weak demand in the economy.

According to Mann, the expected weak consumption path will likely limit firms’ pricing power and moderate cost pass-through.

Mann argued that a more proactive approach would provide domestic investors with clearer guidance on monetary policy direction, helping to keep financial conditions aligned with interest rate decisions.

Despite the Bank of England’s two earlier rate cuts, Mann noted that financial conditions had not significantly eased. This suggests a disconnect between the Bank’s primary policy tool, the Bank Rate, and real-world borrowing costs, posing challenges for policymakers aiming to maintain the 2% inflation target.

The pound fell initially as the comments led to expectation that the Bank was considering further rate cuts but rallied following a global reaction to the tariffs proposed by President Trump.

Sterling reached a high of 1.2455 and closed at 1.2445.

Federal Reserve Chair Jerome Powell testified on the state of the economy before the Senate Banking, Housing and Urban Affairs Committee. He discussed the semi-annual Monetary Policy Report and answered lawmaker’s questions on assorted topics including interest rates and inflation, bank supervision, tariffs and the independence of the Federal Reserve Board.

Additionally, Democratic lawmakers voiced concerns over how consumer protection laws would be enforced as the Department of Government Efficiency (DOGE) focuses its efforts on the agency.

Elon Musk’s new government department has “flexed its muscles” during its first few weeks in operation, but may well run up against a brick wall if it considers diluting the Fed’s independence.

Although the President and the Treasury Secretary have backed away from “meddling” in interest rate decisions, it appears that no single department is safe from Musk’s clutches.

President Donald Trump has pursued a radical overhaul of the US government since taking office on January 20, aiming to slash spending and dramatically downsize the 2.3 million strong civil service.

He has deputized billionaire Elon Musk to head a “Department of Government Efficiency” that is combing through payment and personnel records.

Musk has been accused of buying the election for Trump, and Democrat Senator, Elizabeth Warren, has roundly criticized his possible interference in Federal payment systems.

Warren, who earlier in the day had been one of Jerome Powell’s interrogators on the House Finance Committee, joined protestors whose fear is that the Department of Government Efficiency could attempt to restrict payments it deems wasteful, in violation of spending laws enacted by Congress. There are also risks of privacy breaches.

We are very strongly committed to the integrity, efficacy, resilience, and all those things of this system,” Powell told Warren in testimony earlier on Tuesday before the Senate Banking Committee.

Trump told reporters yesterday that the effort could cut $1 trillion from the federal budget, which totalled $6.75 trillion in the most recent fiscal year. Independent budget experts, meanwhile, warn that Trump’s tax cut plans could worsen the nation’s long-term fiscal picture.

The US government has spent more money than it has collected every year since 2001, leading to annual budget deficits and a steadily growing debt load.

The country has borrowed heavily to fight wars in Iraq and Afghanistan, finance tax cuts, respond to natural disasters, and help Americans weather the 2007-2009 recession and the COVID-19 pandemic. Washington has run deficits even when the country is not in crisis.

This is the very situation that Rachel Reeves wants to defend against in the UK, but the U.S. has continuously “leveraged” its status as the quasi “world’s financial pressure valve” although that status is now being challenged almost daily.

The dollar index fell for the fifth time in seven sessions yesterday as the market saw hints that the major industrialized nations won’t allow Trump to rise “roughshod” over past agreements.

It fell to a low of 107.78 and closed at 107.93.

Trump will likely try to “divide and conquer” as he did with Jordan yesterday as she promoted his plan to make Gaza the “Riviera of the Middle East.”

European Central Bank President Christine Lagarde told European policymakers yesterday that inflation is easing, and recent rate cuts are starting to take effect but cautioned that uncertainty remains, particularly amid trade frictions and geopolitical tensions.

“Most measures suggest that inflation is converging towards our target on a sustained basis”, Lagarde said during her plenary address before the European Parliament on Monday, noting that eurozone inflation had fallen to 2.5% in January, down from 5.5% a year earlier.

Despite the progress, she reaffirmed the ECB’s cautious approach: “We are not pre-committing to any particular rate path”, she said, warning that global trade disruptions could still disrupt the inflation trajectory. This was a clear warning to those who see a rate cut at every ECB meeting during the first half of the year as a “done deal”.

The ECB lowered interest rates by 125 basis points since June, bringing the deposit facility rate to 2.75%.

She also emphasized the urgency of advancing the digital euro, arguing that a regional payment system would reduce Europe’s reliance on external providers and strengthen its financial resilience.

Digital currencies have become a hot topic globally since Donald Trump invited Elon Musk to join his Cabinet.

The eurozone economy barely expanded in 2024, with gross domestic product rising just 0.9% year-on-year.

The final quarter of the year was particularly weak, as industrial production stagnated, and consumer spending remained subdued despite improving real incomes.

“Manufacturing remains under pressure, but services are holding up,” Lagarde noted, offering a mixed view on the eurozone economy.

“The good news is that labour markets are resilient,” she said, pointing to rising real incomes and a solid job market as potential drivers of consumer confidence. However, “households are hesitant to spend more,” and business investment is still weak.

According to Lagarde, lower borrowing costs should gradually improve conditions, making credit more accessible for businesses and households. External demand could also provide relief, but global trade frictions pose a potential threat.

Beyond monetary policy, Lagarde underscored the importance of strengthening Europe’s financial independence, particularly in digital payments. She noted that Europe is still overly reliant on foreign providers, leaving the region vulnerable to external economic and geopolitical shifts.

“Payments are the backbone of our economy, and Europe cannot afford to be overly dependent on external providers,” she said. The ECB is pushing ahead with plans for a digital euro, which would complement physical cash while ensuring Europe has a resilient, sovereign payment system.

Lagarde also discussed capital market integration, which has been a contentious issue for some time. In his paper on growing investment and output in the region published recently, Mario Draghi spoke of the importance of developing a single capital market to encourage investors to have the confidence to back the region’s entrepreneurs.

The euro has been in reactive mode almost since Trump took office, despite the political events in Germany and France.

Yesterday, it climbed to 1.0381 and closed at 1.0363. There is likely to be some reaction as the German election nears, but the market is expecting “more of the same” with a coalition being elected which while beneficial to overall stability remains hidebound in any attempts at reform.

Have a great day!