19 August 2025: Inflation or recession? The choice facing the BoE

The next meeting of the Bank of England’s Monetary Policy Committee could have far-reaching consequences for the UK economy. While every meeting is important, the meeting scheduled for September may hold the key to whether the country faces a recession in the final quarter of 2025 and the first quarter of 2026, or if inflation will be allowed to reach 4% or even 5%.

The uncertainty caused by the last meeting, at which it took two votes to secure the twenty-five basis point cut that was eventually agreed upon, is leaving both traders and investors uncertain until the path of interest rates is decided. The pound is unlikely to be seen in a positive light until then.

In a speech earlier in the year, independent member Catherine Mann told reporters that she feels that if the Bank is going to either support the economy or come down hard on inflation, it needs to make bold moves rather than the twenty-five-point adjustments that have become the norm. She would support a fifty-point cut in rates to stimulate growth if she felt that there had been a degree of control exerted over rising prices.

The Treasury is examining plans for a new tax on the sale of homes worth more than £500,000 as part of a shake-up of stamp duty and council tax.

House sales dropped sharply last month as the stamp duty deadline put the brakes on buyer activity following a March rush, new figures show. There were 64,680 house sales in April, 64% lower than the 177,440 reported in March, according to estimates from HMRC.

It was also 28% lower than the 89,860 sales reported in April 2024.

HMRC said the latest figures have been affected by changes to stamp duty rates, a property tax which applies in England and Northern Ireland.

Chancellor Rachel Reeves has asked officials to study how a new “proportional” property tax could be introduced and to model its impact ahead of this autumn’s Budget. Ministers have already been briefed on the proposals, which could be rolled out during this parliament, The Guardian reports.

There is bound to be a surfeit of rumour of the actions that Reeves will take in her October Budget to repair the increasingly significant black hole in the country’s finances. She remains committed to the fiscal rules that she adopted when she took office, even as economists believe her intransigence is a part of the problem.

The pound began the week on the back foot, falling to a low yesterday of 1.3487 and closing at 1.3499. Versus the common currency, it climbed to a high of 1.1605, although it later fell back as the Euro regained little composure and closed at 1.1581.

There are similar concerns over the future path of interest rates being expressed by analysts who keep a close eye on the Federal Reserve. Over the first half of the year, Committee Members were united in their view that until the uncertainty caused by Donald Trump’s trade policies and the level of monthly job creation became clearer, rates should remain on hold, particularly since the economy was showing continued robustness.

However, possibly under the influence of the President, two Fed Governors, Michelle Bowman and Michael Barr, have been agitating for lower rates even as several Regional Fed Presidents have called for more clarity before committing to a rate cut.

Fed Chair Jerome Powell will be making the keynote address at the Fed’s annual Symposium at Jackson Hole, Wyoming, later this week, and it would be a major surprise if he fails to address the uncertainty that is surrounding the FOMC’s next meeting, even if he doesn’t strongly hint at either another cut or another pause following the cut that was delivered earlier this month.

Powell, who has a dual mandate as Fed Chairman, is close to entering his final six months in the role and will begin to consider his legacy. As the first Chairman who has come to the job without a formal training in economics, he has brought a “lawyer's eye” to proceedings, considering both inflation and risks to the economy of monetary policy.

He is likely to be remembered for his gaffe when telling the market that he expected inflation following the Pandemic to be transitory in nature, just as price rises climbed to thirty-year highs.

His one-sided battle with President Trump, in which he has suffered some occasional personal abuse, has shown him to be both resolute and driven to do what he considered to be the right thing, although he has doubtless been supported by several of his colleagues.

Powell will not want to be seen as the Chairman who presided over a bout of stagflation, which may temper his hawkish attitude a little towards the end of the year, but he is unlikely to want to see rates cut next month, as inflation is beginning to see the effects of tariffs being passed on to consumers.

The dollar index has begun the week with a positive bias as it moves away from its short-term level of support. Yesterday, it rallied to a high of 98.18, closing at 98.16.

Austrian Central Bank Governor Robert Holzmann retires at the end of this month, having already attended his final meeting of the ECB’s Governing Council. Renowned as the European Central Bank’s most rebellious interest rate-setter, he has one last suggestion before he departs this month: more transparency on policy decisions.

Arch hawk Robert Holzmann, who’s been comfortable delivering a lone ‘no’ vote on occasions during the ECB’s monetary-easing push, wants outsiders to glean more of an understanding of officials’ thinking as they calibrate borrowing costs.

He’d like to see a version of the Federal Reserve’s dot plot, under which policymakers anonymously provide their projections for rates. Alternatively, views diverging from the narrative presented by President Christine Lagarde could be summarised and released.

“When we start out, unanimity is a strong signal,” Holzmann said in an interview before he ceded control of Austria’s Central Bank to former Economy Minister Martin Kocher. “But if the situation is not as clear in what direction you need to move because there are arguments in all directions, then I think deviations have information for the market.”

This parting “gift” caps a six-year stint for Holzmann at the ECB, where the 76-year-old was among the staunchest supporters of the unprecedented ramp-up in rates unleashed to tame the Eurozone’s sharpest-ever spike in prices.

In Germany, the “honeymoon period” of German Chancellor Friedrich Merz’s Centre Right Coalition has ended.

The ZEW Indicator of Economic Sentiment has dropped significantly in August 2025 to +34.7 points, down 18 points from July. The assessment of the current economic situation also weakened, with the situation indicator falling 9.1 points to -68.6 points.

For the eurozone, expectations slipped to +25.1 points, an 11-point decline from the previous month, as growth outlooks were revised down despite earlier stronger estimates compared to Germany. The eurozone’s current situation indicator also deteriorated, dropping 7 points to -31.2 points, ZEW said on its website.

“Financial market experts were disappointed with the EU–US trade deal. In August 2025, the ZEW indicator experienced a substantial decline. This was also due to the poor performance of the German economy in the second quarter of 2025. The outlook has worsened, particularly for the chemical and pharmaceutical industries.

Economists in Germany say the new government's lack of structural reforms, particularly to curb pension costs, poses long-term problems for Germany, even though a massive spending program will boost the economy in the short run.

Germany's anaemic economy could be facing a third consecutive year of contraction, and reviving growth is one of the main tasks of Chancellor Friedrich Merz's government.

The euro staggered yesterday as several European leaders arrived in Washington for a Summit about peace in Ukraine and to hear firsthand the outcome of Trump’s meeting with Putin.

It fell to a low of 1.1656 and closed at 1.1660.

Have a great day!