17 June 2025: At least the triple lock is safe. For now!

Over the past five years, there has been an inordinate amount of conversation about the so-called “triple lock” on the UK state pension. So much so that the entire subject has taken on a life of its own, in which successive Chancellors cannot even mention the subject without the newspapers suggesting that it is about to be removed.

For the current Chancellor, Rachel Reeves, it is something that even she will think twice about doing away with, given her near desperation to balance the country's books.

Reeves has an almost slavish dedication to the idea that every day spending should be covered by “everyday income” in the shape of taxation. This, while increasing borrowing levels as she searches for the magic ingredient that will unlock the potential for increased growth, she is certain exists in the UK economy over the medium term.

The existence of a “magic money tree” has also taken on a life of its own. The line has traditionally been used against Labour by the Conservatives, perhaps most famously by Theresa May in 2017 as she tried to discredit Jeremy Corbyn’s spending commitments.

The adage speaks to the wider right-wing narrative that the Labour Party (or the left more generally) cannot be trusted with the economy, a myth that has long been effectively deployed by right-wing ministers and media alike.

How many times in the past year have we heard the phrase “Reeves refuses to commit” or similar when journalists are asking about either plans, as we saw in the run-up to last week’s spending review or, more significantly, how those plans will be funded.

It is clear and obvious that the money to fund the massive increase in health and defence spending over the next three years will have to come from taxation, since there is no magic money tree.

Very few people are fooled by Reeves’ constant avoidance of the subject, as she and her backroom team at the Treasury are scrambling to find a sector of the public that won't miss a few billion pounds. Since last July, the pensioners, the farmers and the non-dom sector have all been hit, and now the speculation has begun about where she will strike in the Autumn.

She has also tried to increase the employers’ national insurance contribution, which has hit small businesses hard, as can be seen by the GDP data, which went from a 0.7% increase in March to a 0.3% fall in April.

When Reeves announced her budget last Autumn, unveiling a £70 billion boost to public spending to be funded by higher borrowing and £40 billion in tax rises, which mostly hit British businesses, she insisted it was a one-off move, telling lawmakers that “we’re not going to be coming back with more tax increases, or indeed more borrowing.”

Times have changed, however, and as Reeves tries to balance the books and stick to her stated non-negotiable “fiscal rules” while pursuing a spending splurge on public services amid an uncertain economic outlook, she may not have any choice but to enact more unpopular tax rises.

Only time will tell.

The G7 meeting, which is currently taking place in Alberta, Canada, has been billed as the perfect opportunity for the Prime Minister to remind the U.S. President that the full trade deal between the two countries has yet to be agreed. No one is fooled by the constant rhetoric from both Starmer and his trade minister, Jonathan Reynolds, that strenuous negotiations are taking place.

The deal will be agreed at a time that suits Trump, most likely just before or during his state visit to the UK later in the summer.

The financial markets relating, in particular, to Sterling are in a state of flux at the moment as traders look to find a trend that they can rely on. The term uncertainty relates to so many of the moving parts that this week’s meeting of the MPC is shrouded in it.

Yesterday, the pound trod a well-worn path between 1.3620 and 1.3570, closing at 1.3575.

Traders are beginning to tire of the back and forth between Donald Trump and Jerome Powell, in which Trump uses ever more caustic language, personally attacking Powell's intellect, while the Fed Chairman simply ignores the President and gets on with his job of protecting the Central Bank’s dual mandate.

An FOMC meeting begins today, with a decision on monetary policy expected at 7.00 pm London time tomorrow.

It will be a major surprise if a rate cut is announced despite inflation falling last month.

Uncertainty has been the word not only on Powell’s lips, but on the lips of every member of the FOMC who chose to speak on the subject before the blackout that precedes every meeting.

There are very few economists, if any, who do not see the imposition of tariffs as inflationary, so why would anyone expect the Fed to cut rates before their effect is known?

Trump is driven by short-termism. In this view, with inflation having fallen from close to double figures to where it is now, reacting to tight monetary policy if it then rises a little due to an easing of monetary policy, so be it. Powell believes that any increase in inflation would be impossible to control and would be a slippery slope.

Treasury Secretary Scott Bessent has jumped on the Trump bandwagon and called for rates to be cut, but this is little more than a bout of opportunism.

The rise in the price of a barrel of oil continued yesterday as Israel and Iran traded missile strikes, accompanied by ever more dangerous rhetoric. This will not create an environment in which the Fed will want to cut rates, as the recent fall in the price of a gallon of gasoline in the U.S. is set to turn exponentially if the conflict continues for any serious length of time, which appears to be Israel’s intention.

Meanwhile, Trump apparently refused to green-light Israel’s assassination of the Iranian Supreme Leader, although it appears that he supports regime change in the country.

In Alberta, it is understood that Trump will leave the G7 meeting early due to the developing crisis in the Middle East.

At the opening of the meeting, he called it a shame that Russia had been “kicked out” of the G7. He said most of the conversation had been about Russia, so it would have been “useful” if they had been there.

The dollar index is unable to gain any traction at the moment and appears to be looking to find a solid level of support where there is considerable natural buying interest. Although its fall has slowed, it has not found anything other than speculative support so far.

Yesterday it fell to a low of 97.70 before recovering to close at 98.19.

Successive members of the ECB’s board and governing council have not been shy in coming forward to praise their actions in getting inflation back to what they consider to be its natural level of around 2%.

In fact. They may have been so successful that, for the next eighteen months or so, price increases are expected to average 1.6%.

ECB Vice President Luis de Guindos spoke yesterday of whether now would be a good time for a pause in loosening monetary policy. He said that our projections provide the key to understanding our policy decision.

It’s almost a cliché now, but the level of uncertainty is huge. So much so, we published alternative scenarios. The key differences in the scenarios relate to trade policy. In the baseline, we assume no retaliation and a 10% tariff. In the adverse scenario, we assume higher tariffs and retaliation.

The outcome of trade negotiations is by far the most important factor in the level of uncertainty in our projections. These projections form the basis of our monetary policy discussions and decisions. We cannot possibly know in advance the result of those negotiations, so we try to model various outcomes and their effect on inflation, which is of top priority.

We have been clear about how well we have been able to bring down inflation, and it is true what the President (of the ECB) said recently, that we are in a good position.

Despite concerns that the euro’s rise and lower oil prices might drag inflation far below the 2% goal, de Guindos said the bank is not alarmed. “The risk of undershooting is very limited in my view,” he said. “We assess that risks for inflation are balanced.”

While inflation may temporarily dip to 1.4% by Q1 2026, Luis made it clear that labour market conditions and steady wage growth, which he put at 3%, are expected to hold inflation steady in the medium term. He also said that tight labour supply and strong union demands are likely to keep pay increases healthy. That would prevent inflation from falling too far off the ECB’s target.

The result of the euro’s recent rise on inflation should not be underestimated. The ECB prefers to refer to its own policy decisions rather than admit that the recent appreciation in the value of the Euro has given inflation the “final push” over the finishing line.

It should be considered that even as recently as last March, hawkish members of the Governing Council, like Isabel Schnable, were admitting to concerns about how tough the “last mile” would be.

The Euro continued its inexorable rise yesterday, reaching 1.1610 before drifting lower to close at 1.1558.

Have a great day!