21 May 2025: 20k annual ISA limit to stay – Reeves

The three trade deals the UK government has agreed on over the past few weeks will undoubtedly boost economic activity and growth. Still, each could have been so much more beneficial if the Government’s team had been tougher in the negotiations.

The Prime Minister seems so concerned about delivering on his pledges that he is prepared to give up any advantage he has. The deals with the U.S., India, and the European Union have come at some cost to the country.

With India, the country has been forced to allow workers arriving to avoid paying National insurance, the U.S. has been given license to export additional meat and grain to the detriment of British agriculture, and the UK will be governed by several rules when dealing with the EU that Brexit was supposed to have seen withdrawn.

Meanwhile, Cabinet members tell voters they are fulfilling the pledges made a year ago in the run-up to the General Election.

The economy will likely receive a marginal boost, with growth possibly reaching 1% this year, but even that will not be sufficient to stop tax rises from happening again in the Autumn.

The Chancellor, however, averted the fears of savers yesterday when she announced that the £20k tax-free ISA allowance will remain in place.

Sentiment has improved following a basic trade deal with the United States, which still leaves a 10% tariff on British goods but lowers duties on cars and steel. Economists surveyed do not expect it to make much difference to growth.

Twenty-two of fifty raised their growth forecast for this year by 25 basis points on average, with the median at 1.0% versus 0.9% expected in April. It was the first median upgrade in five months.

"The UK government is massively increasing spending this year. There’s a lot of money coming in, and that’s going to act as a bit of a tailwind as well. Real wage growth is also still quite strong, so the economy still has some reasonable underpinnings", said James Smith, economist at ING.

The Bank of England is expected to stick to one interest rate cut per quarter, with the next likely in August and then in November, ending the year at 3.75%.

Still, economists and investors are bracing for inflation to rise well above the BoE’s 2.0% target before easing back by the middle of next year.

Inflation is forecast to have risen sharply to 3.3% in April, from 2.6% in March, in a release due on Wednesday. It will average above 3% this quarter and next, according to the latest poll.

This will concern the more hawkish members of the MPC. Huw Pill, the Bank of England’s Chief Economist, spoke yesterday of his concern that rates have been cut while inflation remains an issue.

The pound rallied to a high of 1.3392 and looks likely to test 1.35 soon as the dollar remains in a funk, driven by economic and trade uncertainty.

Jerome Powell, the Fed Chair, is ignoring the criticism of Donald Trump of his refusal to loosen monetary policy. He has chosen to provide investors with reasons why rates should remain unchanged in light of the uncertainty caused by Trump’s trade policy flip-flopping, rather than confronting the issue head-on.

Trump’s constant goading of Powell is likely a deliberate tactic designed to cast Powell as the fall guy, as growth fails to meet expectations this year.

Trump continues to conveniently forget that the Fed’s explicit mandate comes in two parts. While the FOMC is charged with maintaining growth levels as denoted by job growth, it must do so without causing prices to rise.

The issue is that the Committee is only provided with one tool to do both jobs, and it is a fairly blunt instrument, particularly given that the causes of changes in both growth and inflation are manifold.

The number of new single-family homes in the U.S. on which construction has commenced dropped by 12% in April compared to a year ago, according to new data from the National Association of Home Builders.

The decrease was a result of economic uncertainty over the potential impact of President Donald Trump's tariffs, the growing cost of building materials, and historically high mortgage rates, the NAHB said.

Last month's decrease in single-family starts, a measure of builders' willingness to spend resources on new housing construction projects, comes after a similar fall in March.

The number of permits to build new single-family units in the U.S. plummeted after the recession of 2007-2009 and never completely recovered, leaving the country with a severe shortage of homes compared to the growing demand. This contributed substantially to the current housing affordability crisis.

While a growing number of new construction projects have been approved over the past few years, the country is still far from closing the gap between supply and demand.

Builders have also warned that Trump's sweeping tariffs, impacting building materials such as softwood timber and lumber, often imported from Canada, will increase costs and potentially discourage new projects.

Federal Reserve (Fed) Bank of St Louis President Alberto Musalem added his voice to the chorus of Fed speakers warning that US trade policy under the guidance of the Trump administration is poised to not only weigh on growth, but could also exacerbate price volatility, one of the Fed's favourite stand-in phrases for inflation.

Musalem believes that monetary policy is well-positioned. If inflation expectations become de-anchored, Fed policy should prioritise price stability. The US economy has underlying strength, the labour market is stable, and inflation has eased, but remains above the 2% goal. Although Economic policy uncertainty is unusually high.

The dollar index fell back below the symbolically important level of 100 yesterday as Fed officials' comments led to further uncertainty about the economic outlook.

It has fallen to a low of 99.61 in early Asian trading.

Klass Knot, a member of the European Central Bank's monetary policy committee, expressed his reservations about making an early decision to cut interest rates during the upcoming June meeting, pointing out that medium-term inflation expectations remain uncertain, making it difficult to take a decisive step at this time.

Knot clarified that the updated estimates from the European Central Bank are likely to show a gradual decline in inflation rates during the current year and the next, yet the outlook for the long-term trend in prices remains clouded, which weakens the justification for a swift move in monetary policy.

However, the more hawkish Pierre Wunsch, the Governor of the Belgian Central Bank, was more dovish than usual, commenting that the European Central Bank may need to cut interest rates to "slightly below" 2% as global trade tensions pose downside risks to inflation and growth.

Wunsch, previously known for his hawkish stance, told the FT that recent shocks and uncertainty could justify a mildly supportive monetary policy, including a potential cut below the current 2.25% deposit rate.

Wunsch sees no case for a larger, half-point cut in the foreseeable future.

He also said that developments since U.S. President Donald Trump's tariff announcements on April 2 had created clear "downside risks to inflation" in the euro zone, along with additional threats to economic growth.

Wunsch told the FT that the euro zone might be exposed to "negative economic shock in the short term" that might be followed by a "positive shock in 2026 and 2027."

In an interview earlier in the year, Wunsch had warned against "sleepwalking" into excessive interest rate cuts, urging caution as the ECB considered further reductions.

Markets now see a roughly 90% chance of an ECB rate cut on June 5, but have priced in only one additional easing over the rest of the year, suggesting that the ECB's deposit rate could bottom out at 1.75%.

Meanwhile, ECB Executive Board member Isabel Schnabel said the Eurozone’s disinflation process remains on track, but “new shocks”, particularly from trade tariffs, are presenting emerging risks.

While tariffs may dampen inflation in the short term, Schnabel warned they pose medium-term upside risks, warranting a “steady hand” in monetary policy.

She emphasised the importance of not overlooking “supply-side shocks” if they appear persistent, as doing so could risk “de-anchoring inflation expectations”.

A seemingly simple task of deciding whether to cut rates or not has significant consequences for the economy as it rumbles through every area of growth, investment and the value of the currency,

Yesterday, the Euro made gains, reaching a high of 1.1269, but in Asia this morning it has experienced even more significant support, reaching a high of 1.1335.

Have a great day!