18 September 2025: Reeves is told to scrap the OBR

Headline inflation remained at 3.8% last month, but worryingly, food prices rose for the fifth consecutive month. Economists believe that the rate will peak at 4% next month and then begin to fall back towards the Bank of England’s target of 2%. August core inflation, which excludes more volatile energy, food, alcohol and tobacco prices, rose by an annual 3.6%, down from 3.8% in the twelve months to July.

The cost of airfares was the main downward driver this month, with prices rising less than a year ago following the significant increase in July linked to the timing of the summer holidays.

Chancellor Rachel Reeves commented that she recognised that families are finding it tough and that for many, the economy feels stuck. “That’s why I’m determined to bring costs down and support people who are facing higher bills”. This has become a recurring theme for Reeves, as she figuratively shrugs her shoulders and tries to imply that she is “on the case”, even as results prove her wrong.

The Bank of England is closely watching inflation data after forecasting the consumer price index could peak at 4%, before retreating in the first half of 2026.

The Bank cut interest rates in August, taking the key rate from 4.25% to 4%, and saying it would take a “gradual and careful” approach to monetary easing, mindful of inflationary pressures but aware of the need to promote growth and investment.

The City believes that today's vote will be 7-2 in favour of leaving rates unchanged, with the two dissenting votes coming from Swati Dhingra and Alan Taylor.

As the economy appears to have stalled with monthly GDP figures showing that there was zero growth in July, inflation has become exceedingly “sticky” Although there is no “official” guidance on what constitutes stagflation, with growth falling and inflation likely to rise next month, the final quarter of the year may well be characterised as such.

While wage growth has fallen in recent months, more progress is required on the inflation front to convince the Bank’s policymakers that a further rate cut is possible in the current economic environment. A fourth rate cut in 2025 will require additional labour market weakness, a somewhat pyrrhic victory.

There was at least some good news on the economy, as three major U.S. tech firms announced significant investments timed to coincide with U.S. President Trump’s visit this week. Nvidia, Google and Microsoft announced investments of as much as twenty-five billion pounds in the creation and development of “AI Factories”.

We will undoubtedly hear more from the Prime Minister later today as the “business” part of the visit begins following yesterday's pageantry.

Traders were more interested in events in America yesterday as the pound climbed to a high of 1.3592, although it trailed off following the Fed’s rate announcement to close at 1.3558.

The FOMC performed what the Administration sees as its duty by not only cutting rates last evening but also intimated that there will be more cuts before the end of the year.

The Federal Open Market Committee voted 11–1 for the move, with new Governor Stephen Miran, who was appointed just in time to vote, dissenting in favour of a half-point cut. Governors Michelle Bowman and Christopher Waller, who had earlier pushed for faster easing, supported the quarter-point trim this time.

Looking at the history of “jumbo” rate cuts by the Fed, the economy has not yet reached the point where the slowdown justifies such drastic action, as both employment and inflation point to a smaller twenty-five-point cut.

In his statement, the Fed Chairman, Jerome Powell, said economic growth moderated in the first half of the year, job gains slowed, and unemployment edged up, even as inflation stayed elevated. The Central Bank flagged “downside risks to employment” as a key factor in its decision.

Furthermore, the Fed's updated 'dot-plot' showed policymakers now expect three rate cuts in 2025, up from two in June, with two more reductions likely before year-end. Inflation is forecast to end 2025 at 3.1%, unchanged from June, while growth estimates were raised modestly.

We don’t need it to soften any more and don’t want it to,” Powell said, while cautioning that goods prices remain a source of inflation pressure. Tariffs, he added, were acting more like a one-time shock than a sustained driver.

Markets welcomed the shift. “The Fed’s 25-bps cut marks a pivotal policy shift, lowering borrowing costs and reviving global risk appetite.

The politicisation of the Central Bank was evidenced by the actions of Miran, Bowman and Waller, who will no doubt continue to push for further cuts.

Growth-sensitive sectors such as housing, tech and small caps stand to benefit, though banks may face margin compression.

Commenting further on the fall in employment, Powell sounded the alarm on what many recent graduates already know: getting a job right out of college is really tough now.

Speaking at his regular press conference following the FOMC meeting, Powell called it “an interesting labour market.” He said, “Kids coming out of college, younger candidates, and minorities are having a hard time finding jobs.” Overall, the “job finding rate” is very low, Powell said, but then again, so is the layoff rate. “So you’ve got a low firing, low hiring environment.”

The dollar index fell to multi-year lows following the cut and the Fed’s rate comments. It reached a low of 96.22 but recovered to close at 97.03.

The minutes of the meeting will be published in three weeks, when analysts will get an opportunity to sift through the rhetoric to find out what the Bank’s true sentiment is.

Inflation remained at 2% in the three months to August, persuading the ECB President to declare that the “disinflationary process is complete”

In a speech yesterday, Lagarde told reporters that the ECB can concentrate on boosting growth in the remaining meetings this year.

Meanwhile, the European Union's rate of annual inflation remained unchanged at 2.4% last month.

Food, alcohol and tobacco saw the highest annual rate during the month, at 3.2%, down a hair's breadth from 3.3% in July, This was followed by services (3.1%, compared with 3.2% in July), non-energy industrial goods (unchanged at 0.8%) and energy (-2.0%, compared with -2.4% in July).

The lowest annual rates were registered in Cyprus (0.0%), France (0.8%) and Italy (1.6%). The highest annual rates were recorded in Romania (8.5%), Estonia (6.2%) and Croatia (4.6%). Compared with July, annual inflation fell in nine of the bloc's member states, remained stable in four and rose in fourteen.

Speaking at the post-meeting press conference in Frankfurt, ECB president Christine Lagarde said the “disinflationary process is over” and that the eurozone is “in a good place. The domestic economy is showing resilience, the labour market is solid and risks are more balanced,” Lagarde told journalists, adding that inflation was “where we want it to be”.

She cited a resilient labour market, a stable inflation outlook and upwardly revised growth projections for 2025.

It is hard to say how long this period of relative calm in the Eurozone markets will last. There are still issues over growth in Germany, while storm clouds continue to gather over France, which still has no budget agreed for 2026.

The next “cab off the rank” will be the effect of tariffs on the economy, which has not yet been fully felt. However, negotiators still believe that they can persuade the U.S. administration to lower some of them, particularly in the auto sector.

Former ECB President Mario Draghi, who has become a self-proclaimed Eurozone “conscience”, has warned that the EU’s economic competitiveness is on the retreat due to “inaction” by Brussels and national capitals, a year after the former Italian premier set out recommendations on how to close the gap with global rivals such as the US and China. Draghi was tasked by the European Commission to put forward a report on the bloc’s competitiveness in September last year. The commission adopted his 383 recommendations as a framework for overhauling the EU economy.

Still, just a fraction of them have been implemented since, with the rest mired in political disagreement and bureaucratic wrangling, which is typical of the European Commission and Parliament, which, ironically, were one of the main criticisms of his recommendations.

The year remains in an upward trend, although most of the drivers emanate from outside the region. It reached a high of 1.1918 but saw a dramatic reversal, closing at 1.1813.

Have a great day!