16 October 2025: The IMF warns Reeves against watering down OBR powers

As part of its quarterly review of the world's largest economies, the IMF, while providing the Chancellor with a double-edged sword regarding growth and inflation, also warned Rachel Reeves against watering down the powers of the Office for Budget Responsibility.

It is rumoured that as part of her Autumn Statement next month, she will announce a change in the OBR’s provision of twice-yearly assessment of the Government’s tax and spending policies to an annual review.

Victor Gaspar, the IMF’s head of fiscal affairs, said it was “best international practice” for countries to publish more than one evaluation of the economy per year. The inference is that receiving a single review annually will mean the Chancellor faces less external pressure on her fiscal policies.

Last month, Reeves claimed that the Fund supported just one forecast a year. The Chancellor said she was planning to move “to just one major fiscal event a year” following recommendations by the IMF. She added: “To be able to do that, we do need to change the way that the OBR do their forecasting.

The tension is gradually rising amongst observers and economists about what measures the Chancellor will introduce to balance the country’s books.

Her own MPs want her to increase public spending, aided by higher taxes on the wealthy, together with a significant shake-up of property taxes such as stamp duty and council tax. Meanwhile, the opposition parties have their own views on how the books should be balanced.

There is still controversy about the size of the “black hole” between tax income and spending, which Reeves will want to fill. First, she will need to tell MPs how large the gap has become.

The International Monetary Fund presented a sombre outlook on Britain’s economy this week. The country is on course for the highest inflation rate in the G7 next year, while suffering the slowest rise in living standards amongst the major Western economies.

In its latest projections, the IMF warns that inflation is expected to average 3.4 percent this year, up from 2.5 percent last year. In turn, it predicts that while the UK’s overall growth rate this year will be the second-highest in the G7, growth per capita is expected to be a lamentable 0.5 percent in 2026.

Reeves has allowed herself to be wooed by the “major powers” in the City of London, while paying lip service to supporting the entire economy to raise the standard of living for all. She has isolated several groups, including pensioners and farmers, with the measures she has introduced in her previous reviews.

Next month's budget may be a make-or-break for the Chancellor, despite the Prime Minister's continued support.

As the country enters its second year under a socialist Government, the Party is falling further behind in pursuing the five goals outlined in its 2024 manifesto.

It is clear that Sir Keir Starmer, who has no experience of leading a nation, underestimated the number of day-to-day issues that will need his attention. This has meant he has taken his eye off the ball when it comes to advancing his overall strategy to cut the cost of living and improve living standards for all.

Bank of England policymaker Sarah Breedon has told Welsh business leaders that the recent rise in inflation should prove to be a temporary “bump in the road” rather than a lasting shift, but warned that external shocks and fragile demand mean businesses face a period of continued uncertainty. Her stance is at odds with several of her colleagues on the Monetary Policy Committee, who see inflation as the most significant obstacle to the Bank's ability to provide additional support for the economy by softening monetary policy.

Breedon is Deputy Governor for Financial Stability and a member of the Monetary Policy Committee, Financial Policy Committee, Prudential Regulation Committee and the Bank’s Court of Directors.

Speaking to an audience at Cardiff Business School, Breedon said the latest increase was being driven mainly by external and administered costs rather than renewed domestic price pressures.

She pointed to higher water bills and public transport fares, and to base effects from last year’s energy price falls dropping out of the comparison. Food inflation also remained elevated at 5.1% in August, reflecting global supply chain shocks and climate-related disruptions in key agricultural markets, as the UK imports 40% of its food.

The pound rallied to a high of 1.3408 in response to a more dovish outlook provided by the Chairman of the Federal Reserve, who hinted at two further rate cuts in the U.S. this year to support the labour market. It managed to retain most of its gains, closing at 1.3403.

It has come as a surprise to many “Fed-watchers” that the FOMC’s newest member has presented a far more balanced view of the economy than was expected when President Trump appointed him.

Stephen Miran has shared his views on several topics, including the inflationary effects of tariffs and the U.S.-China trade relationship.

Trump likes to make a single policy decision regarding the entirety of his country’s relationship with its trading partners, rather than breaking it down into more manageable “slices” as his predecessors have done.

His tariffs are generally pushing inflation higher as companies are caught between absorbing the costs or passing them on to customers, according to a Federal Reserve report delivered yesterday.

The Central Bank’s periodic Beige Book report, published eight times a year generally at about six-week intervals, categorises overall economic growth as having “changed little” since the last report on Sept. 3. Labour markets “were largely stable” as demand was “muted” for most of the Fed’s 12 districts.

When it came to prices, though, Trump’s duties, implemented in April and then staggered through the ensuing months, showed an impact.

“Prices rose further during the reporting period,” the report stated. “Tariff-induced input cost increases were reported across many Districts, but the extent of those higher costs passing through to final prices varied.”

In some cases, firms held prices unchanged to stay competitive and to appease inflation-sensitive clients. However, some businesses said they were “fully passing higher import costs along to their customers.”

The release comes amid a dearth of relevant economic data due to a government shutdown entering its third week; key providers such as the Labour and Commerce departments are closed, mainly due to the impasse.

However, Bureau of Labour Statistics workers have been called back to release the pivotal consumer price index report, used both as an inflation gauge and to index cost-of-living adjustments for Social Security recipients.

The CPI reading, which normally would have been released yesterday, will be released Oct. 24, the last inflation reading the Fed will get before its policy meeting Oct. 28-29.

Fed Chair Jerome Powell sent a clear message Wednesday, reiterating that the Federal Reserve is still leaning toward lower rates —and for the sluggish U.S. housing market, that could be the break it's been needing for almost two quarters.

Powell’s latest speech struck a dovish tone, citing continued labour market weakness and global risks, like tensions with China and softening economic activity, as justification for further easing.

"The downside risks to employment have shifted our assessment of the balance of risks," he said, referencing the rationale behind September’s rate cut and hinting at more to come.

The dollar index suffered amid market views of Jerome Powell's pivot. It fell to a low of 98.66 and closed there. Traders are concerned that the Fed is on the cusp of abandoning its tough stance on inflation to concentrate on economic growth.

Bundesbank President Joachim Nagel told reporters yesterday that he sees no new case for the ECB to cut interest rates. However, he warned that some components of the inflationary picture warrant vigilance.

While it’s too early to discuss what will happen with borrowing costs in the months ahead, the Bundesbank chief told CNBC that consumer prices are rising almost in line with the 2% goal, despite “sticky” services inflation.

“What I see is that we’re close to our target,” Nagel said yesterday. “I do not see any reason to change anything, if there’s not something new coming, and I do not see where it might come from.”

The ECB is mostly content with the level of rates, repeatedly describing its monetary policy settings as “in a good place.” The majority sees inflation, despite projected shortfalls over the next two years, as anchored near 2% and reckons the region’s 20-nation economy has so far weathered the turbulence stemming from US tariffs well.

Eurozone industrial production fell in August, reflecting uncertainty about the global trade environment.

Industrial output dropped 1.2% month-on-month, in contrast to the 0.5% increase in July, Eurostat said yesterday. However, the decline was less severe than the forecast of 1.6%.

The slump was primarily due to the contraction in capital and durable consumer goods production. Capital goods output decreased by 2.2%, and durable consumer goods output eased by 1.6%.

Production of intermediate and energy fell 0.2% and 0.6%, respectively. In contrast, non-durable consumer goods output moved up 0.1%.

The ECB is inclined to accept the sluggish state of the economy, since it believes it has only monetary policy tools to change the growth outlook.

The Central Bank and the European Commission are both expecting the other to take the lead, and while this impasse continues, the economy will simply “bump along the bottom”

The Eurozone is already overburdened with committees and commissions. Still, it is crying out for a single body responsible for the overall economy, working in close partnership with other bodies that have only a one-dimensional view of the economy.

The French government's 2026 budget plans are based on rosy economic assumptions, and its belt-tightening measures may fall short —or never even take shape —if the new administration collapses, the independent fiscal watchdog said on Tuesday.

Prime Minister Sébastien Lecornu, reappointed on Friday after having quit at the start of last week, presented a 2026 budget bill to parliament on Tuesday while facing the prospect of a no-confidence vote if his leftist opponents cannot stomach his budget plans.

The Euro gained strength as the dollar weakened, reacting poorly to Jerome Powell’s dovish stance on monetary policy. The single currency rallied to a high of 1.1647, where it closed.

Have a great day!