1 July 2026: The BOE Should Lower Rate if There Is Peace in the Middle East, Taylor Says

Andy Burnham left with a £4.7bn Budget problem after Keir Starmer unveiled a defence plan. According to the FT, Burnham was blindsided by a funding gap of nearly £5bn in the government’s long-awaited defence spending plan, delivered yesterday.

Britain’s probable next prime minister had been briefed on outgoing leader Sir Keir Starmer’s plan to increase military spending by £15bn over the next four years. But he was unaware of estimates, revealed in a policy paper issued by the Treasury on Tuesday, that £4.7bn of defence spending until 2030 will have to be found in the next Budget.

Downing Street did not respond to a request for comment. The spending shortfall is approximately £1.2bn a year. UK defence spending is now expected to reach 2.7 percent of GDP by 2030, under a plan unveiled by Starmer on Tuesday, but experts warn that much of the modernisation the military needs will not arrive until the next decade.

General Sir Richard Barrons, former commander of the UK Joint Forces Command and an author of the 2025 strategic defence review, the road map for Britain’s military transformation, said the UK would be unprepared for conflict with its most likely near-term adversary: Russia. Starmer himself has identified Russia as a risk of attacking NATO by 2030.

The Bank of England should lower its key interest rate if peace in the Middle East is secured and energy prices fall, possibly to a level that would stimulate the U.K. economy, a member of the Monetary Policy Committee said on Tuesday.

The BOE left its key interest rate unchanged last week and signalled it may yet lift borrowing costs if inflation threatens to remain above its 2% target for longer than it currently anticipates.

In a speech, MPC member Alan Taylor said that as long as there is high uncertainty about the conflict's progress, keeping the key rate at 3.75% is the right decision.

But if the threat of prolonged high inflation eases as a peaceful resolution is secured, the right move would be to lower borrowing costs.

“If something closer to that benign scenario plays out, we must be ready to act,” said Taylor, who has typically favoured lower borrowing costs than many of his colleagues. “In my view, interest rates can and should resume their downward path to neutral.”

Taylor has been known as an inflation dove since he took up his post on the MPC in December 2024. Of the fourteen meetings he has attended, he has voted for a cut on six occasions.

The UK’s gross domestic product grew by 0.6% in the first quarter, the Office for National Statistics said, matching the preliminary estimate released in May and accelerating from the revised 0.1% recorded in the previous quarter.

Growth was broad-based across all three sectors of the economy, with the services sector leading the expansion, up 0.8%. The ONS also revised annual GDP growth for 2025 down to 1.3% from 1.4%.

Meanwhile, real household disposable income per person fell by 0.8% over the quarter, while the household saving ratio declined to 8.9% from 9.6%, reflecting weaker household finances despite stronger headline economic growth.

The pound fell to a low of 1.3212 yesterday as it remains in the grip of political uncertainty. It remains unclear whether Andy Burnham will take over as Leader of the Labour Party or whether another MP will challenge when nominations open next week. However, it recovered to close little changed at 1.3262.

The number of job openings in the United States remained unchanged at 7.6 million in May, while April job openings were revised down by 33,000, according to the US Bureau of Labour Statistics.

The data reported by the Bureau came in better than estimates, with market participants expecting 7.3 million job openings, reducing the chances of rate cuts.

The data also suggest that the US economy remained resilient in May despite elevated energy costs due to geopolitical tensions between the US and Iran.

Hires were unchanged at 5.2 million, while total separations changed little at 5.1 million. Within separations, resignations (3.1 million) changed little, while layoffs and discharges (1.7 million) were unchanged," the Bureau of Labour Statistics said in a press release.

The Bureau said that job openings increased in wholesale trade, while hires increased in the federal government.

Total separations, which include resignations, layoffs, discharges, and other separations, were little changed at 5.1 million, while the rate was unchanged at 3.2%, and total separations remained flat across all industries.

"The number of layoffs and discharges was unchanged at 1.7 million, while the rate changed little at 1.1% in May. Layoffs and discharges decreased in arts, entertainment, and recreation," the Bureau of Labour Statistics said.

"In May, establishments with 1 to 9 employees and establishments with 5,000 or more employees showed little or no change in job openings, hires, and separations rates," the Bureau of Labour Statistics added.

The Bureau said that establishments with one to nine employees and establishments with more than 5,000 employees showed no change in job openings, hires, and separations rates.

Consumer confidence edged up in June, as falling energy prices offset concerns about the labour market.

The Conference Board’s gauge of confidence rose 0.6 points to 91.2, following a downward revision to the prior month, according to data released yesterday. The median estimate in a Bloomberg survey of economists was 94.4.

An indicator of present conditions fell, while a measure of expectations for the next six months advanced. A metric of perceptions of the job market, closely monitored by economists, fell to its lowest level in more than five years.

The report shows that cheaper petrol, resulting from a truce in the Middle East, helped assuage some of the anxiety Americans have expressed about the economy in recent months. However, views of the job market deteriorated, and consumers expect little improvement in the coming months.

“Consumer confidence inched up in June as falling oil prices in recent weeks provided some relief to consumer inflation fears,” Dana Peterson, the chief economist of the Conference Board, said in a statement.

In the survey, the share of consumers who said jobs were plentiful increased slightly, while the share saying jobs were hard to get jumped. The difference between these two measures dropped to the lowest level since early 2021.

The latest release of the S&P/Case-Shiller House Price Index, a key measure of changes in the selling prices of single-family homes across 20 metropolitan areas, showed a notable increase. The actual figure reported was 1.1%, exceeding the forecast of 0.9% and indicating stronger-than-anticipated housing market performance.

Economists had predicted a steady growth rate, matching the previous month’s figure of 0.9%. However, the actual increase to 1.1% reflects stronger-than-expected housing demand. This uptick in the index suggests that the housing market is maintaining its momentum, potentially driven by low mortgage rates, limited supply, and sustained demand in urban areas.

Investors and policymakers closely monitor the S&P/Case-Shiller Index because it provides insights into the health of the real estate sector, a significant component of the U.S. economy. A higher reading is generally seen as bullish for the U.S. dollar, indicating economic strength and potentially influencing monetary policy decisions.

The dollar index reacted positively to yesterday’s data releases but remains capped by sellers around 101.50. It peaked at 101.43 before frontrunners emerged, pushing it back to close at 101.16.

The conflict in the Middle East is stoking inflation and weighing on economic expansion, according to European Central Bank Governing Council member Olli Rehn.

“This energy shock has been stagflationary,” Rehn told Bloomberg Television in Sintra, Portugal. “Not like the 1970s, which was very deep, but its nature is very similar.”

Despite that, the Finnish official doesn’t anticipate significant consequences for prices elsewhere in the economy and wouldn’t reveal what that could mean for the ECB’s upcoming interest-rate decision.

“I don’t see any major second-round effects materialising, and inflation expectations are anchored,” he said. “So let’s not jump the gun and let’s see what the data will tell us next month.”

The ECB’s July meeting is just over three weeks away, and officials are deciding whether to raise rates for a second consecutive time. While June’s hike was widely anticipated after the war in Iran sent oil prices and Eurozone inflation surging, the possibility of peace has since tempered expectations of further tightening. The outcome of the 60-day truce will likely have a greater effect on voting intentions at the Governing Council meeting than a single month’s data.

Meanwhile, in a speech at the ECB’s annual meeting in Sintra, the Central Bank’s President, Christine Lagarde, told delegates that the decision to raise the bank’s key interest rate this month was based on the bank’s projections rather than a pre-emptive move to manage the risk of inflation rising uncontrollably.

“Some have characterised our rate increase earlier this month as an ‘insurance hike.’ That is not an accurate description,” Lagarde said at the opening of the ECB’s central-banking forum in Sintra, Portugal.

“Our rate increase was justified under every scenario considered,” she added. “Nothing we have observed since then has called this assessment into question.”

The comments reinforced Lagarde’s remarks at the ECB’s policy meeting earlier in June, when the bank raised its key rate for the first time in almost three years by a quarter-point to 2.25%. Policymakers judged that the recent surge in energy prices, driven by the war in Iran and its effects on inflation, was too significant to ignore. Eurozone inflation has been above the ECB’s 2% target since March.

The bank published fresh macroeconomic forecasts at that meeting, projecting higher headline and core inflation, with inflation only returning to target in the last quarter of 2027. Holding interest rates would have left inflation above 2% in 2028 too, Lagarde said.

Inflation slowed more than expected across most major Eurozone economies in June, preliminary data showed yesterday, easing pressure on the European Central Bank to raise interest ‌rates in the near term.

Germany, France and Italy all reported softer-than-expected readings, while Spain was the only large economy in which inflation did not ease. The figures increase the likelihood that overall Eurozone inflation, due later this morning, could undershoot expectations.

Economists polled by Reuters have forecast the bloc's inflation to be 3.0% in June.

Upside risks to inflation have declined markedly. Although expectations remain elevated and energy prices could rise again, there is no immediate need for the ECB to raise interest rates further.

The Euro was virtually unchanged yesterday as traders were unsure about today's inflation data, while the situation in the Middle East remains unclear. The common currency opened at 1.1422 and closed at 1.1420.

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