15 June 2026: The Bank of England risks being left behind

Every economist surveyed in a Reuters poll published on Friday expects the Bank of England to leave the Base Rate at 3.75% at its upcoming Monetary Policy Committee meeting this Thursday, though a significant minority now price in a hike before the year is out.

Of the 65 economists polled between 5 and 12 June, all predicted no change at the June meeting, with median forecasts pointing to an unchanged rate for the rest of 2026. However, nearly 40% of respondents forecast at least one hike, while only six anticipated a 25-basis-point cut by year-end.

By coincidence, the outcome of the Bank’s interest rate-setting meeting will be announced as voters head to the polls in Makerfield. If Andy Burnham wins, it will trigger a contest for the next Prime Minister and could see Chancellor Rachel Reeves bundled out of the Treasury.

The mayhem in the Labour Party, exacerbated by John Healey’s departure from Defence, adds political uncertainty to geoeconomic stress stemming from conflict in the Arabian Gulf. Rate-setters will also find it hard to ignore developments in financial markets, even as news arrives that a peace deal has been agreed and will be signed in Switzerland this Friday.

The SpaceX mania and the upcoming initial public offerings for Anthropic and OpenAI all point to an AI bubble. Some of the most terrifying events in stock market history, the Crash of 1929 and ‘Black Monday’ in 1987, were triggered by disputed interest rate rises.

After a buoyant start to the year, UK GDP went into reverse in April, falling 0.1 percent.

Forecasters predict a “slow burn” second quarter. Worryingly, inflationary expectations, critical for Britain’s rate-setters, are on the rise, climbing to 4 percent in May from 3.2 percent.

That is not surprising given references by Government Ministers to the cost-of-living crisis. Before the Iran war, two UK rate cuts, from 3.75 percent, were on the horizon this year.

That clearly is off the table, or at least the timing will be extended. Lower borrowing costs would boost housing, consumption and business investment. They would offset baked-in tax increases.

That is now the least likely outcome. The Bank was slow to raise rates in 2022 after Russia invaded Ukraine. The inflation genie was out of the bottle, and prices rocketed to a peak of 11.1 percent that October.

Bailey’s plodding approach is usually to wait and see. The tide is moving to higher rates across the G7, and rate-setters may well feel they have little choice but to act soon. Not to do so would risk a run on the pound, exacerbating the inflation threat.

Industrial production stalled month-on-month in April, missing market expectations for a 0.1% gain and following a 0.2% decline in the previous month.

At the same time, manufacturing production growth slowed (0.4% vs 1.2%), driven largely by lower output in transport equipment (-1.9% vs 2%) and electrical equipment (-5.5% vs 3.3%).

This partly offset gains in mining and quarrying, which grew by 2.5% after a 2.3% decline in the prior month.

Yearly, industrial output fell 0.2% in April, beating market forecasts for a 0.1% decline and following a flat reading in the preceding period.

Be honest, how many could have placed the Makerfield constituency on a map six weeks ago? Now it has become the central point of the future of two experienced politicians, one of whose careers will be consigned to history’s rubbish heap by Friday.

Andy Burnham holds a 5% lead, aided by a split in the right-wing vote between Reform UK and Restore Britain. Burnham has criticised Labour’s freeze on the income tax threshold for harming pensioners and signalled a review if he became Prime Minister. A win could pave the way for Burnham to challenge Starmer, though rivals and volatile political conditions could complicate his path.

The Makerfield contest has become a proxy battle for Labour’s leadership, with a Burnham victory potentially triggering a challenge to Sir Keir Starmer amid mounting internal dissent. Starmer’s authority has been weakened by local election defeats, ministerial resignations, and policy controversies, prompting speculation about his ability to survive a leadership contest. A Burnham win could accelerate calls for change, though the outcome is far from certain given the volatile political climate and potential for tactical voting.

However, a Burnham win on Thursday, despite looking more likely than it did a couple of weeks ago, prompted by the main candidates' appearance on BBC’s Question Time, in which Burnham consolidated his position as “the Darling of the North”, while in Reform’s Robert Kenyon, the programme perfectly illustrated the paucity of suitable candidates for Nigel Farage’s Party. Arriving in Westminster will just be the start of a potentially rocky path for the Mayor of Greater Manchester.

Sterling posted a mildly positive week overall, with the pound gaining modestly against most major currencies but losing a little ground against a few high-yielding pairs. The volatility that has been missing from the markets this week is likely to return in spades as G7 monetary policy meetings and political plot twists return to the arena, not to mention a settlement of the conflict in Iran.

The pound reached a high of 1.3330 and closed at 1.3307.

The U.S. stock market faces uncertainty, as does the dollar, as Federal Reserve Chair Kevin Warsh leads his first meeting amid concerns about interest rate hikes. Investors are closely watching the Fed's stance on inflation and the potential for future rate adjustments.

Recent market fluctuations highlight investor apprehension about economic policy. CPI Inflation hit its highest level in three years last month, according to fresh data released last week, but new Federal Reserve Chair Kevin Warsh wants the Central Bank to focus on different measures.

“The measures I prefer are trimmed averages,” he said during his confirmation hearing in April. “What I’m most interested in is what the underlying inflation rate is, not what’s the one-time change in prices because of a change in geopolitics or a change in the cost of beef.”

That attitude may not convince consumers.

The public just wwantsto know how much “things” cost compared to one month or one year ago. In their mind, it is easy to calculate.

Those “trimmed-mean averages” are alternative inflation gauges released by regional Feds that can give investors and policymakers a better sense of inflation’s breadth and direction.

Warsh presides over his first policy meeting as chair later this week. Investors now see the Fed potentially raising interest rates this year because of an Iran-war-fuelled pickup in inflation. But if Warsh persuades his fellow policymakers to weigh different inflation measures instead, the bank could keep rates where they are or even lower them, risking a bigger jump in inflation.

The Federal Reserve Bank of Dallas produces a trimmed-mean gauge showing annual inflation of 2.3% in April. A similar estimate from the Cleveland Fed puts annual inflation in May at 2.9%. In contrast, the May CPI came in at 4.2%. The Producer Price Index, which measures inflation at the factory gate and was released on Thursday, reached a more-than-three-year high of 6.5% in May. The PPI may foreshadow what is in store for consumers.

But some of Warsh’s colleagues warn that trimmed-mean averages aren’t accurately capturing what’s really happening at the moment.

Irrespective of how inflation is measured or calculated, Warsh has a long to-do list for the Federal Reserve.

There’s the FOMC’s dual mandate of promoting maximum employment and stable prices, which requires a balancing act by Warsh and his fellow committee members. He also wants to narrow the Fed’s focus, rethink post-meeting press conferences and forward-looking guidance. He has essentially said his colleagues talk too much.

But one of the biggest challenges of Warsh’s chairmanship will be following up on his pre-confirmation goal of shrinking the Sasquatch-sized footprint the Fed has in the financial markets. Reducing its $6.7 trillion balance sheet won’t be easy.

Critics of the Fed’s market intervention, like Warsh, say that since the Global Financial Crisis, the Central Bank has manipulated specific pockets of the economy by buying Treasurys and mortgage-backed securities, controlling the yield curve, lending to banks, intervening in credit markets, and more.

Warsh has suggested that the Fed’s massive portfolio of government bonds and mortgage-backed securities poses a threat to the central bank’s independence, since it gives the Fed more sway over more areas of the financial markets, heightening opportunities for political influence. Essentially, he says that if the Fed wants to remain independent of Trump’s grasp, it must operate with a smaller balance sheet, although its reduction may cause some havoc.

The dollar weakened modestly last week, with the Dollar Index falling about –0.53%. The index slipped from 99.75 to close at 99.51, marking a soft but orderly decline.

The European Central Bank's decision to raise its key interest rate reflects an increasingly complex economic situation, analysts say, driven by soaring inflation and energy prices stemming from the US-Iran war. Analysts also believe it is an effort to avoid repeating mistakes dating back a decade and a half.

Higher energy costs pushed euro-area inflation to 3.2 percent in May, up from 3 percent in April, well above the regulator's 2 percent target. ECB Governing Council member Joachim Nagel hinted on Friday that another rate rise is possible next month.

The ECB projects headline inflation to average 3 percent this year, falling to 2.3 percent in 2027. It revised its economic growth projections for 2026 and 2027 to 0.8 percent and 1.2 percent, respectively, while maintaining a 1.5 percent growth forecast for 2028.

The downward revision to growth potential reflected "a more pronounced impact of the war on commodity markets, real incomes and confidence", the ECB said.

The decision is a reminder of a couple of situations years ago that share several similarities with the present.

Despite a renewed sense of optimism that a deal between the US and Iran is close, the European Central Bank has warned that prices are unlikely to fall overnight even if a peace agreement is sealed later this week.

President of the Bundesbank, Joachim Nagel, made the comments during an interview with Deutschlandfunk.

He cited fundamental changes to supply chains as a direct consequence of the war in the Middle East.

“We may not ever get back to building on the data we had before this conflict, because supply chains have obviously changed, and risk premiums may also increase.”

The Strait of Hormuz has been effectively shut down since the beginning of the war, causing significant global economic hardship, especially at the pump.

For the first time since 2023, the ECB raised interest rates, which Nagel described as necessary given rising costs stemming from the continued standoff between Tehran and Washington.

He rejected the accusation that raising interest rates would stifle economic growth.

Nagel also confirmed that the ECB is considering raising rates again in July.

Consumer prices in the Euro-area rose 3.2% in May, while business activity is shrinking.

Nagel struck a depressing tone, claiming that he doesn’t think we will even return to what we had before the outbreak of war in the Middle East on February 28.

The eurozone economy recorded an unexpected contraction in the first quarter, dragged down by a sharp fall in Irish gross domestic product, a recurring distortion linked to the accounting practices of the many multinationals based in the country.

According to new data from the EU's statistics agency, GDP in the Eurozone fell by 0.2% in the first three months of the year compared with the previous quarter, sharply lower than its initial estimate of 0.1% growth.

The unusually large downward revision was due to a steeper-than-estimated drop in activity in Ireland -- now put at 12.1%, far beyond an initial 2% forecast.

Ireland's Central Statistics Office said on Thursday that the exceptional revision was due to the inclusion of data linked to multinationals, which carry enormous weight in the Irish economy.

The Euro made modest gains last week, buoyed by the hope of a Middle East peace deal. It reached a high of 1.1590 and closed at 1.1568.

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