23 June 2025: Rising grocery bills threaten rate cuts

A survey published by the Confederation of British Industry recently asked its members to describe the business environment in the UK. Respondents were given several words to describe how easy or difficult they found, for example, dealing with Government departments, finding new overseas customers, and employing new staff.

The overwhelming view of CBI members is that the current environment is “hostile.”

Around 70% of boardroom leaders expect worldwide economic conditions to worsen in the year ahead, while just 5.4% believe they will improve, according to the survey.

By contrast, in 2024, only 22% anticipated a deterioration in global economic conditions, while more than double that number believed conditions would improve.

Nearly two-thirds of respondents also think that the UK’s economic circumstances will weaken further, compared to 25% last year.

Executives are concerned that the competitiveness of British manufacturing will not improve due to tariffs being added to exports to the U.S. and the intransigence of the UK Government's policy.

One further issue facing the UK is the number of people over 50 who are leaving the workforce to take early retirement. This is adding to the skills shortage that is threatening Angela Rayner’s plans to radically increase the number of dwellings being built.

According to the Financial Times, the UK’s burst of strong economic growth at the start of the year is beginning to fizzle out as the jobs market weakens, the trade shock bites and higher taxes dampen business optimism, analysts have warned. If the slowdown continues, 2025 would mark the fourth year in a row in which the British economy fails to sustain its early momentum after an auspicious start to the year.

There is little confidence that the Bank of England will be in a position to cut interest rates again before September, and even that prediction is now in jeopardy given the U.S. strikes on Iran’s nuclear facilities, which are sure to push up the oil price.

The MPC voted 6-3 in favour of leaving rates unchanged at its meeting last week.

Although there is widespread acceptance of the Bank’s independence, Rachel Reeves would prefer interest rates to be lower to lessen the burden of her policies on UK household budgets.

With unemployment rising, growth fading, and inflation falling, the case for a pre-emptive rate cut was compelling. Yet, the Monetary Policy Committee (MPC) chose inaction following last month’s rate cut.

This might be defensible if Britain were in the midst of a robust recovery, but it isn’t. Labour’s tax-raising Budget, combined with a sharp increase in public borrowing and spending, is already sapping confidence.

Fiscal policy is amplifying the slowdown rather than offsetting it. If monetary policy stays restrictive, the result will be a pincer movement, squeezing households and choking businesses.

The pound rallied on Friday, reaching a high of 1.3505, but the U.S. attack on Iran saw it open appreciably lower in the Far East this morning, falling to a low of 1.3403.

President Trump’s itchy trigger finger got the better of him over the weekend, leading him to approve a major military strike on Iran’s nuclear facilities.

Trump has asked why there would not be a "regime change" in Iran following US strikes, calling its population to "make Iran great again". Meanwhile, Iran's UN envoy says the current situation provides a "historic test" for the body.

One of the first Government leaders to react was the Australian Prime Minister, Anthony Albanese, who has expressed support for the US strike on Iran and called for de-escalation and a return to diplomacy.

“The world has long agreed that Iran cannot be allowed to get a nuclear weapon, and we support action to prevent that,” Albanese told reporters in Canberra.

He said that “the information has been clear” that Iran had enriched uranium to 60%, and “there is no other explanation for it to reach 60, other than engaging in a programme that wasn’t about civilian nuclear power”. “Had Iran complied with the very reasonable requests that were made, including by the IAEA, then circumstances would have been different,” Albanese added, referring to limitations on enrichment.

Asia woke up this morning to another potential challenge to the world order.

South Korean acting Finance Minister Lee Hyoung-il has warned of heightened volatility in global financial and energy markets amid the escalating tensions in the Middle East, according to the official Yonhap news agency.

Lee made the remarks while presiding over a meeting on macroeconomic trends and risks, citing growing uncertainty after the US military involvement in Israel’s military operation against Iran.

Iran holds the second-largest gas reserves globally and is OPEC’s third-largest crude producer.

“Global oil prices have already opened 2% to 3% higher today, signalling increased volatility in international energy markets,” Lee noted.

Lee said the government must be on high alert and closely monitor international energy prices and supply-demand dynamics, while stressing the importance of a quick and coordinated response, Yonhap reported.

South Korea is the world’s 13th-largest economy and the fourth in Asia in terms of gross domestic product.

Trump may have released some of the angst he currently feels towards the Federal Reserve by attacking Iran. He again attacked Fed Chairman Jerome Powell over the FOMC’s decision to leave rates unchanged at its meeting last week.

However, Trump will have been cheered by an interview with CNBC on Friday by Federal Reserve Governor Christopher Waller, saying that the Fed is in a position to cut the policy rate as early as July.

He believes that Central banks should look through tariff effects on inflation, since he does not think the inflation impact from tariffs will be big, and the trend is looking good."

He commented that he is "not sure if the committee would go along, but the data is good, unemployment is low, and inflation is close to target."

The dollar has reacted to the fall in risk appetite associated with the U.S. strikes on Iran.

The dollar index rose to a high of 99.20 as it “gapped” higher at the Asian opening. It has since settled down a little and is currently training (5.00 am) at 99.01.

It appears that the ECB is incapable of dealing with more than one issue at a time. It ignored the economic ramifications of the significant increases in rates it made to bring inflation under control, which saw the economies of several Eurozone members come close to recession, and now that it believes that inflation has been conquered, the Governing Council will begin to figure out how to improve growth.

ECB policymaker Mário Centeno said in an interview with the Italian daily La Stampa published yesterday, “The Eurozone economy is weak and needs 'further stimulus' from the European Central Bank.

The ECB cut interest rates for the eighth time in a year earlier this month to support a sluggish recovery in the Eurozone, but signalled a pause in July.

The ECB needs to drop the brakes and hit the gas again. Centeno, a Governing Council Member, believes that the eurozone economy is still too weak to sustain current interest rates and called for “further stimulus.”

He went on to say, “The level of rates must be compatible with an economy that generates stable inflation at 2%,” but in my view, that economy “does not yet exist in the euro area.”

Centeno pointed to both supply and demand as being too fragile to bring inflation back to the ECB’s target without more help.

“Today, GDP is below potential, which indicates that the economy is not in equilibrium,” he said, adding that if the neutral rate stands at 2%, but output is still under, then interest rates should fall below that level to close the gap.

His comments come just weeks before the next ECB policy decision on July 24, where a pause is widely expected. But by that date, he may no longer even be in the room. His term as head of Portugal’s central bank ends earlier in July, and the government hasn’t confirmed whether he’ll be reappointed.

He took over in 2020, after serving as finance minister under a Socialist-led government that was later voted out. In Portugal, central bank governors are named by the government and serve five-year terms.

The ECB’s easing campaign started last June, when euro-area inflation had just come off its 10% high from 2022, driven by energy shocks linked to Russia’s war in Ukraine.

The position of the dollar as the world’s reserve chief currency has come under question this week from two significant quarters, the European Central Bank and the Central Bank of China.

Both would appear to be “flogging a dead horse”. The global economy is years away from accepting either the Yuan or the Euro as the primary reserve currency, but for totally different reasons,

While the Chinese economy is progressing well, it is too prone to manipulation by the Chinese authorities for any of the major institutions like the IMF to accept it. While the Eurozone is too susceptible to economic shocks, which see it fragment into its member states, to be sufficiently stable.

The Euro has begun the week lower. Opening in Asia at 1.1456 before it regained a little composure and is currently trading at 1.1508.

Have a great day!