20 October 2025: Miliband is on board with VAT cuts on energy bills

Bank of England Governor Andrew Bailey believes that Brexit continues to be a drag on the growth potential of the country as well as a lasting source of inflation. Following the IMF’s announcement that, in its view, inflation will be the highest in the G7 this year, Bailey told an international banking conference that since the UK had left the European Union, the country has struggled to bring inflation back to its 2% target.

Monetary Policy Committee member Megan Greene said on Friday that she did not see a case for the BoE to continue its current quarterly pace of rate cuts, but did not think the rate-cutting cycle was over.

Greene, speaking at an event hosted by the Atlantic Council think tank in Washington, said a rise in British unemployment reported on Tuesday was in line with her expectations, and reduced the chance of high inflation translating into a wage-price spiral.

Greene, an external member of the MPC, voted against the BoE's most recent rate cut in August. Another external member of the Committee, Alan Taylor, who believes that rate cuts should be accelerated, told an audience last week that there is a “rising” risk that the UK economy could see a “more forceful downturn” due to higher borrowing costs.

There is a small but growing chance that the UK will witness negative growth and “recession dynamics start to kick in”.

It came as the bank rate-setter cautioned that it is “increasingly likely” that the UK economy will fall into a “weakened state for a sustained period” with inflation sliding below target levels.

He said he believes this could lead to “undue damage” to economic activity in the UK.

In a speech at King’s College, Cambridge, the rate-setter said he thinks the likelihood of a “soft landing” following the recent uptick in inflation is now receding.

It comes amid a slowdown in economic growth in the UK after vigorous activity in the first quarter, ahead of expected tariff disruption.

The Bank of England has been steadily reducing interest rates over the past year as it seeks to reduce inflation, with the central bank holding rates at 4% in last month’s meeting. The jury is still out on the prospects for a rate cut at the next meeting of the MPC, with the vote expected to be close.

The Chancellor of the Exchequer, who is spending her time writing her Budget speech despite attending the IMF’s annual meeting in Washington last week, appears to be on the verge of reducing household energy bills by removing or at least reducing the 5% rate of VAT that is currently added to gas and electricity bills. The Energy Secretary agrees with this strategy, despite saying that he believes that the net-zero policy is not keeping energy bills unduly raised.

Ed Miliband insisted it was 'not correct' to suggest Labour's bid for a decarbonised electricity grid was increasing the burden on families.

On 1 October, the energy bill for the average household paying by direct debit for gas and electricity increased from £1,720 to £1,755 per year.

Octopus Energy, the UK's biggest energy supplier, has since warned electricity prices are on track to jump by a fifth over the next four or five years.

Both the Conservatives and Reform UK have vowed to ditch Britain's commitment to reach Net Zero by 2050. And US President Donald Trump has told Sir Keir Starmer to ramp up the production of fossil fuels to cut energy bills as he urged the Prime Minister to 'drill, baby, drill'.

Last week, Sterling managed to regain most of the losses it had made the week before. It rallied to a high of 1.3471 and closed at 1.3427.

Next week's meeting of the Federal Reserve’s Open Market Committee is likely to see interest rates cut by twenty-five basis points in what will be the first of two cuts expected to be made in the final quarter of the year.

There has been a subtle change in the comments being made by Fed Chair Jerome Powell, over the past month or so, moving from concern over inflation to needing to address the continuing weakness of the Labour Market.

The continued weakness of the employment data is so far unconfirmed since the Department of Labour statistics is currently closed due to the shutdown of the Federal Government. President Trump believes that solving conflicts in Gaza and Ukraine is more important than the U.S. economy. His Treasury Secretary has the same view. Scott Bessent has spoken recently about the effect of China’s restrictions on the export of rare earths. Still, he has only spoken in general terms about the fifteen billion dollars a day that is being wiped off GDP.

It may be that there is feverish activity taking place behind the scenes, but this Administration would likely shout from the rooftops about any progress that puts it in a better light.

After the shock of October 10, when Donald Trump announced 100% tariffs on Chinese products, the President quickly softened his tone, assuring that trade relations “will be fine.” That sweetener was well received by markets, helping Wall Street rebound early in the week.

The recovery was also fuelled by stronger-than-expected bank earnings and by dovish remarks from Federal Reserve Chair Jerome Powell.

Powell warned of mounting risks to employment, another indication that the central bank is likely to continue easing borrowing costs, bolstering bets on a rate cut later this month.

Major U.S. banks, including JPMorgan Chase, Goldman Sachs, Bank of America, Citigroup, Wells Fargo and Morgan Stanley, all beat analyst estimates, highlighting the resilience of the country’s financial giants. Yet cracks are beginning to show further down the ladder among smaller regional lenders. It was not that long ago that the Fed had to deal with the failure of two regional lenders, and it was believed that the Central Bank had “plugged” any gaps in its supervision.

Markets were reminded of that fragility on Thursday, when a new wave of volatility hit the sector as several regional banks flagged credit problems. Zions Bancorporation disclosed it would record a $50 million charge-off in the third quarter, tied to two troubled commercial and industrial loans held by its California Bank & Trust unit.

Meanwhile, FOMC members are mostly still concerned about inflation, although they are unable to confirm that wages are still rising faster than inflation, simply because the official data is unavailable.

Federal Reserve Bank of St. Louis President Alberto Musalem indicated on Friday that while he could support a rate cut if labour market risks emerge, the Central Bank should not follow a predetermined course and must remain cautious.

Musalem noted that housing services inflation has been showing a positive trend, but pointed out that other components of services inflation remain sticky.

Looking ahead, the St. Louis Fed president said he expects businesses to begin passing on tariffs to consumers starting in the fourth quarter of 2025. He projected that these tariffs would continue to work through the economy over the next two to three quarters.

The dollar index saw a mild correction as traders became aware of the volume of sell orders that had been placed around the pivotal 100 level.

It retreated to a low of 98.03 but recovered to close at 98.55

European Central Bank President Christine Lagarde has praised Germany for finally opening its purse strings.

Fiscal policy “will play a more supportive role in the years ahead,” she said in Washington on Saturday. “This is, of course, especially true for countries that are going to increase their defence investment, and this is certainly the case in a big way for Germany, where major military and infrastructure investments are underway, which are just beginning to have an impact but which will be rolled out over the next three years in a very significant way.”

“Germany is using its balance sheet and its capacity to borrow,” Lagarde said, speaking on the sidelines of the IMF’s annual meetings.

New Chancellor Friedrich Merz pushed through a landmark spending bill even before taking office, unleashing the power of the federal balance sheet to transform Germany’s military and revamp its infrastructure.

It is not unusual for the European Union to rely on Germany to pull it out of a potential crisis. It has happened at least twice before, in 2008 and 2012.

Speaking on the same panel as the ECB chief, International Monetary Fund Managing Director Kristalina Georgieva was also full of praise for Europe’s biggest economy.

The German Government uses the power due to the size of its economy as a tool to maintain its hegemony over the rest of the region, as it recovers from an almost three-year contraction of its economy. It still needs to do more work on its entire infrastructure, which is still mired in outdated working practices and reliance on imported fossil fuels.

President Trump has warned that until the entire EU stops buying energy from Russia, the effect of sanctions due to its invasion of Ukraine will have only a minimal impact.

Lagarde repeated her mantra that interest rates are in a “good place” for the trip to Washington and received backup from nearly all her colleagues who also made the trip.

Policymakers speaking on the sidelines of the IMF’s annual meetings in the US capital echoed Lagarde in signalling that the ECB is unlikely to cut its deposit rate, which has been at 2% since June, at this month’s meeting.

However, some warned that inflation risks are more on the downside and argued that a rate cut is the more likely next move. Others expressed concern that price pressures may turn out to be stronger than thought, and opened the door to a hike as the ECB’s next step.

Yet others, still suffering from ripple effects of the unconventional tools used to tackle past crises, want to preserve firepower and see the ECB’s job done unless it encounters another big shock.

Chief Economist Philip Lane stuck to the script on how policy will be set looking ahead. “We mean it when we say it’s kind of data-dependent, meeting by meeting,” he said during a panel discussion, reiterating the ECB’s official line.

Monetary policy is a journey rather than a destination, as it is a constantly evolving beast. Interest rates are the only tool available to the ECB currently, and they are an unwieldy tool to use to try to create a soft landing for the economy.

The Euro found some relief last week as the dollar was driven by uncertainty over next week’s meeting of the FOMC. The common currency rose to a high of 1.1728, but was unable to break the previous week’s high and drifted back to close at 1.1653.

Have a great day!