16 June 2025: Reeves’ popularity is collapsing

It is understood that the Treasury is already working on proposals for tax increases in the Autumn following last week's spending review, and the possibility that the economy will remain sluggish for the foreseeable future and will not produce sufficient growth for tax income to finance the Government’s spending plans.

There have been constant comments about “black holes” in the country’s finances since Labour came to power almost a year ago, but apart from repairing the issues she found, Rachel Reeves appears to have created further problems.

Reeves has made a rod for her own back by sticking rigidly to her fiscal rules. She has repeatedly stated that changing the budgetary rules, designed to provide certainty over UK public finances, is not an option, even if the economic outlook deteriorates.

At her spring statement, she left herself on course to meet those rules with less than £10bn of headroom to spare, on a total budget for day-to-day spending of more than £1.3tn. Reeves, it seems, is a believer in sailing close to the wind. Unfortunately, she is not a “lucky” Chancellor who, when faced with a projected ten billion pound surplus, often finds that circumstances overtake her and headroom simply vanishes.

Paul Johnson, the director of the Institute for Fiscal Studies (IFS), gave a grim assessment of the country's finances when interviewed following the announcement of the spending plans. Reeves has made economic growth the Treasury's main priority since Labour returned to power last July. However, she has faced pushback after several controversial policy moves in the Autumn Budget.

While GDP in the UK jumped by 0.7 percent for the first quarter of the year, it slipped by 0.3 percent in April, according to figures from the Office for National Statistics (ONS).

Projections from the International Monetary Fund estimate Britain will see GDP rise by 1.2 percent in 2025. Geopolitical tensions and US tariffs are unlikely to see the data miss on the upside.

The price of Brent Crude Oil jumped by as much as 13pc to more than $78 a barrel on Friday morning after Israel killed military chief Mohammad Bagheri and conducted a “pre-emptive strike” against the regime’s nuclear facilities. The jump was the biggest increase since the early days of Russia’s invasion of Ukraine, with Benjamin Netanyahu, the Israeli prime minister, vowing that the battle will continue for as long as it takes.

This will certainly affect the Bank of England’s ability to make further rate cuts before the end of the year.

The monetary policy committee will meet later this week, and the overwhelming feeling in the City is that rates will remain unchanged, with just Swati Dhingra and Alan Taylor voting for a further rate cut.

Last week, Sterling bucked the usual trend of investors rushing to the dollar when uncertainty increases, possibly due to the U.S. President being at the centre of the issue.

The pound reached a high of 1.3629 early on Friday morning but drifted lower as the day progressed, closing at 1.3552.

The Federal Reserve, whose rate-setting Open Market Committee meets this week to discuss monetary policy, is not likely to find itself in a position to comply with President Trump’s demands for rates to be cut as Israel and Iran ramp up the uncertainty which surrounds financial markets currently.

In a move that has been denied by several Presidents going back at least as far as Reagan, Trump appears to have given Israel the green light to destroy Iranian nuclear capability. The action taken by Tel Aviv has widened to the assassination of military commanders and prominent figures from Iran’s nuclear programme.

Iran’s response has been both immediate and severe in a “conflict” that may well escalate into a full-scale war.

The US Central Bank is expected to keep interest rates unchanged for a fourth straight policy meeting this week, despite President Donald Trump’s push for rate cuts.

While the independent Federal Reserve has started lowering rates from recent highs, officials have held the level steady this year as Trump’s tariffs began rippling through the world’s biggest economy. Now, the tariff issue has been joined by potentially the most significant of the conflicts that are taking place currently.

The humanitarian crisis that is developing due to Israel’s constant bombardment of Gaza and the apparent escalation of the war in Ukraine will drive energy prices higher, and with that, inflation in the world's developed nations.

It is hard to consider whether the Federal Reserve is behind the curve on monetary policy with so much happening internationally that will affect the U.S. economy domestically.

Inflation rose by 0.1% in April. Many signs indicate that rates should be lower, but the Fed has chosen to keep the interest rate steady because of what may happen “down the road”, and it is not a good look for a Central Bank to be reversing policy decisions since it is an admission of an error.

The Labour Department’s May survey of households found 700,000 fewer people with jobs than in April, a clear sign of strain in small businesses. Forget the Fed Funds rate that is charged between banks for a moment; the prime interest rate is 7.5%, too high for most businesses. Credit-card interest rates are above 20%, a record high. The mortgage rate is prohibitive, driving up housing costs and rents. Monthly mortgage payments are at a record high, and builder confidence is down. This paints a wholly different picture of the economy for those who live outside the U.S.

Strong growth based on increased market-based production is fully consistent with the Fed’s dual mandate of price stability and full employment. Price stability leads to strong private-sector investment and job growth, which in turn fosters the robust production needed for price stability. It’s a virtuous circle that leads to lower interest rates, higher wages and improved affordability.

The dollar did not react well to the further instability created by Israel's attack on Iran. It fell to a low of 98.00 but recovered to close at 98.15.

Luis De Guindos, the Vice President of the European Central Bank, told reporters on Friday that he is becoming more concerned about growth than inflation, as interest rates have now reached a neutral state.

Since the latest rate cut, the ECB members have been making victory laps on inflation as they've been basically stating that they've achieved their price stability mandate, and now they will focus on keeping inflation at target against the risk of undershooting it.

However, an undershoot on inflation may be necessary if the ECB wants to try to stimulate growth in the Euro area. The primary mandate of the European Central Bank is to maintain price stability, which means keeping inflation low and stable. The ECB also has only a secondary mandate to support the general economic policies of the European Union.

Given that growth is considered secondary to inflation says a lot about the conservative attitude that is displayed most of the time by members of the Bank’s Governing Council.

De Guindos said that the bloc’s economy had proven resilient but faced several risks, such as tariffs, that could curb growth. The use of the US dollar in international funding, payment and trade transactions, or as a reserve currency, will not be challenged in the short term. But the role of the euro can gradually expand, especially if we deliver on “more Europe.”

The euro area economy has proved fairly resilient to date, supported by a strong labour market, but recent developments may well have a dampening impact on growth in the euro area.

Speaking in Beijing overnight, European Central Bank (ECB) President Christine Lagarde has issued a stark warning against rising trade protectionism, saying that the recent US tariff measures are creating uncertainty, undermining confidence and investment, and posing risks to global growth.

It has become clear over the past few weeks that the European Union is making conscious efforts to move closer to China, presumably as it sees a continued deterioration of its relationship with the U.S. during the second term of President Trump.

Eurozone industry and trade took major hits in April, likely reflecting US tariff announcements, challenging the view of economists that the bloc is holding up well in the face of economic turmoil.

Industrial production fell by 2.4% month-on-month in April, more than the already-weak expectation of a 1.7% fall in a Reuters poll of economists, as every segment within industry suffered a contraction, data from Eurostat showed on Friday.

Trade also suffered, with the trade surplus falling to just 9.9 billion euros compared with the previous month’s 37.3 billion euros.

The weak figures were not unexpected as US firms were front-loading purchases in February and March in anticipation of the April 2 tariff announcement, but the reversal is larger than many had anticipated, indicating downside risks to annual economic growth forecasts, which are already below 1%

ECB Executive Board Member Isabel Schnabel has signalled that the Central Bank’s monetary easing cycle is “coming to an end,” citing stable medium-term inflation forecasts and improving macroeconomic conditions.

Speaking with notable confidence, Schnabel downplayed the expected dip in inflation, projected at just 1.6% in 2026, as a “temporary deviation” caused by energy base effects and a stronger euro.

The single currency dipped to a low of 1.1496, driven by the uncertainty in the Middle East, but rallied to close the week at 1.1553.

Have a great day!