14 May 2025: Greene and Mann explain their recent voting decisions

In a blow to the Chancellor’s drive for UK financial institutions to “help” with funding of “UK PLC”, Lloyds Bank has snubbed an invitation from Rachel Reeves to join a £50 billion pact to support investment in infrastructure projects.

The Mansion House accord would see 17 of the UK’s biggest pension providers invest £50 billion in private assets such as infrastructure and property by 2030. Half of that money would go into British projects.

Experts believe that the lack of confidence that the City has in Reeves is a far more relevant statement of the rift that has developed between the market and the Government.

Bank of England Monetary Policy Committee member Megan Greene told reporters yesterday that wage and inflation measures were moving in the right direction but remained too high. She was worried about rising public inflation expectations.

"What's a little bit more worrisome for me is that medium-term inflation expectations have also started picking up," Greene said in a panel discussion during a conference at King’s Business School.

Last week, Greene voted with the majority when the BoE's Monetary Policy Committee cut interest rates by a quarter of a percentage point for the fourth time since last August.

Meanwhile, fellow MPC member Catherine Mann defended her decision to vote for no change as she returned to her hawkish outlook, having argued for a more aggressive easing of monetary policy recently.

At a conference yesterday, she maintained that the Central Bank must remain vigilant in its outlook to deal with uncertainty, volatility and risk premiums.

"When will we stop using the restrictive language? When it is appropriate," she commented, answering her own question.

She gave the audience her views on r-star, the value that represents the interest rate that would prevail in an economy when it is operating at its potential level of output with stable inflation and full employment, also known as the neutral rate of interest, explaining that the past few years have seen significant variation in how much expected consumer prices index (CPI) inflation outcomes deviate from the BoE's 2% target.

Therefore, the Bank "cannot be assured that inflation drift is constant over time, and therefore we cannot ignore it when evaluating the degree of restrictiveness, either in nominal or in real terms", Mann said.

She continued: "Understanding uncertainty and volatility and risk premiums are key ingredients of determining the degree of restrictiveness of monetary policy."

There is continued uncertainty in financial markets despite the progress that has been made recently, which has seen the U.S. reach an agreement with China and the UK regarding the imposition of tariffs. The pound opened at 1.3205 yesterday and made steady gains throughout the session, closing at 1.3304.

President Trump, in his first visit of his second term in office to the Middle East, received a royal reception in the Saudi Arabian Capital, Riyadh, where he met Crown Prince Mohammed bin Salman.

Trump insisted that his visit, which will also include Qatari capital Doha as well as Abu Dhabi, is based more on making deals rather than diplomacy. He did, however, take aim at Tehran, giving an ultimatum to Iran as he said he wanted to “make a deal” with the country and make “the world a safer place”, he said.

“But if Iran’s leadership rejects this olive branch and continues to pick on its neighbours, then we will have no option but to inflict maximum pressure and drive Iranian oil exports to zero, as we have done before.

He signed an agreement estimated to be worth $600 billion with the region’s largest economy, including $120 billion in arms sales. Saudi Arabia has relied upon American military assistance since the early days of oil exploration in the country.

Also commenting on the monetary policy situation at home, Trump renewed his criticism of the Federal Reserve's leadership for not cutting interest rates amid its concerns about inflation, which remains above the central bank's target range.

Trump criticised Fed Chair Jerome Powell in a Truth Social post, arguing that he's behind the curve in lowering interest rates when compared with America's peers.

"No Inflation, and Prices of Gasoline, Energy, Groceries, and practically everything else, are Down, the Fed must lower the rate, like Europe and China have done," Trump wrote on his Truth Social platform. "What is wrong with Too Late Powell? Not fair to America, which is ready to blossom? Just let it all happen, it will be a beautiful thing!"

Trump has lobbied Powell and the Fed more broadly to lower interest rates to boost the economy and potentially offset price hikes stemming from his tariffs on imported goods. However, the Fed has signalled it will wait to cut interest rates until there are either signs of inflation returning to its 2% target or a weakening in the labour market.

In truth, inflation has been falling recently, but the Fed remains cautious, concerned that if tariffs are eventually imposed on U.S. consumers when buying goods manufactured overseas, there will certainly be an inflationary impact.

A new report from Goldman Sachs economists examined the risks of undermining the independence of central banks to set monetary policy free of political interference. The report concluded that it can lead to higher inflation, reduced stock prices and a weaker currency.

Goldman Sachs economists examined studies related to the independence of central banks around the world and found: "Economic commentators broadly agree that more politically independent central banks are better able to balance their goals of maintaining low and stable prices while keeping economic output near full potential."

The dollar’s recent volatility has been calmed to a large extent by the trade agreement that has been reached with China, although it still lacks a definitive direction. Yesterday, the index opened at around 101.50 and drifted lower for most of the day, closing at 100.98.

ECB Governing Council Member Isabel Schnabel has “come out swinging” in her one-person crusade to halt the Bank’s continuation of its cycle of interest rate cuts.

She continued her hawkish rhetoric, commenting that the European Central Bank should stop cutting borrowing costs as turmoil in the global economy is fuelling price pressures and inflation was at risk of exceeding the bank's 2% target in the medium term.

Inflation has been rapidly retreating, and policymakers have already begun to consider another cut on June 5, taking the deposit rate to 2%.

Some of the world's major currencies will try to compete with the dollar on the global stage and could even attract some investor flows, but the dollar will stay the world's key currency for some time to come, Dutch Central Bank chief Klaas Knot said.

Some investors have reduced their exposure to the dollar in recent months, worried that trade tensions and erratic policy by the U.S. administration will ultimately erode the greenback's global reserve currency status.

But others argue that there is no alternative for now since the dollar market is far bigger than any other competitor, and the Eurozone, the largest potential challenger, is simply too fragmented.

"There will be competition between currencies," Knot, the head of the global Financial Stability Board, told a conference on Tuesday. "But I think there is simply no alternative yet for the role that the dollar plays."

Knot, the longest-serving member of the European Central Bank's Governing Council, argued that investors could reduce their dollar exposure, but that in itself would not dethrone the currency.

"The starting point is that most international investors today are overweight in the U.S. dollar because of the returns they've seen over the last 10 years," Knot said. "Maybe we will see a move for the more neutral weighing."

The Eurozone could make its currency a more attractive financial instrument, but that would require a great deal of internal structural work to revive long-stalled integration efforts, he said.

"The daily turnover in 10-year US Treasuries is around 900 billion euros, while the daily turnover in 10-year Bund is 30 billion," Knot said. "That tells you something about the liquidity of the market and the capability to hedge your risk."

The latest ZEW survey of German investor optimism was published yesterday.

The headline Sentiment Index rebounded to 25.2 in May from -14 in April, beating the market consensus of 11.9 by a wide margin.

The Current Situation Index eased slightly to -82 in the same period, as against the April reading of -81.2.

The Eurozone ZEW Economic Sentiment Index came in at 11.6 in May from -18.5 in April. The market expectation was -3.5.

Expectations are brightening, with a new government in place in Germany, some progress in the tariff disputes and a stabilising inflation rate, optimism has increased, while the outlook has improved in particular for banking, automobile, chemical, metal, machine and steel sectors.

The Euro attracted some moderate buying interest following the release of the data, but it remained capped in a narrow range. Having opened at 1.1112, it traded up to a high of 1.1180, where a few commercial sellers had placed their orders.

Have a great day!