23 May 2025: Economists have scaled back bets on rate cuts after April inflation

In an announcement steeped in irony, the Office for National Statistics published data yesterday that showed that net migration, the difference between the number of people arriving in the UK and those leaving, halved to 491,000 in 2024 compared to 2023.

The irony is that the fall was driven by legislation brought in by the previous Government.

The Conservative administration raised the minimum salary level for immigrants, making it more difficult for them to be accompanied by dependents.

Two other areas of the migration story were only marginally less welcome. The number of asylum seekers fell slightly, while the number of failed asylum claimants who were deported rose slightly.

The Home Secretary, Yvette Cooper, said she was encouraged by the news, but that more work needed to be done since the net migration figure is still “way too high”.

Conversely, two particular sectors of the economy decried the fall. The dropl in overseas visas for the care sector, which are about to be phased out, will lead to another big fall, but will threaten irrevocable damage to the social care system, while the home building sector faces shortages in skilled labour at a time when the Government has pledged to build 1.5 million new homes during the life of this Parliament.

The fall in net migration is the biggest calendar-year drop since the early stages of the Covid pandemic, when net migration fell from 184,000 in the year ending December 2019 to 93,000 in the year ending December 2020.

It is also the largest numerical drop for any 12 months. The ONS said the sharp decline was caused by reduced immigration from non-EU countries for work and study visas and by an increase in emigration from the UK.

The economy will have to be "strong enough" for the government to U-turn on winter fuel payment cuts, the business secretary has said. In an example of poor communication and a Prime Minister who plots his own path, Keir Starmer and his ministers had insisted they would stick to their guns on the policy, even just hours before Sir Keir revealed his change of heart at Prime Minister's Questions.

But Jonathan Reynolds, the business secretary, revealed there is more at play to be able to change the policy.

"The economy has got to be strong enough to give us the capacity to make the kind of decisions people want us to see," he said.

"We want people to know we're listening.”

Chancellor Rachel Reeves has committed to just one major fiscal event a year, meaning just one annual budget in the autumn.

Autumn budgets normally take place in October, with the previous one happening at the end of the month.

If this year's budget is around the same date, it will leave little time for the extra winter fuel payments to be made, as they are paid between November and December.

The shock rise in inflation is still driving the pound higher as bets on a rate cut at the next meeting of the MPC have been slashed. It rose to a high of 1.3430 yesterday on a day in which it was less volatile and the rise was more gradual. It eventually closed marginally lower at 1.3427.

Comments on monetary policy by Managing Board Members are being far more widely observed than those of their colleagues on the FOMC, who are Presidents of the Federal Reserve.

Two Board Members, Michelle Bowman and Christopher Warren, have held the limelight recently despite their views being based far more on theoretical judgments than those from the regions, which are far more about what is happening on the ground.

The Fed’s Governing Board is mostly cloistered in Washington and is staffed by bureaucrats, and has the same voting powers as the rotating Presidents of the twelve regional Federal Reserves.

Bowman was Donald Trump’s pick for the position of Chair of the Committee on Banking Supervision, which drew criticism from Congress, most particularly Elizabeth Warren, who fiercely protects Fed Independence. Bowman has pledged to simplify the US regulatory framework for banks if confirmed as the Fed’s next vice-chair for supervision.

Speaking before the Senate Banking Committee on Thursday, Bowman said she would seek to streamline oversight, reduce complexity and promote innovation within the financial system.

“The US regulatory framework has grown expansively to become overly complicated and redundant, with conflicting and overlapping requirements,” she said, adding that this imposes “unnecessary and significant costs” on banks and their customers.

Warren is concerned that Bowman is too involved in Wall Street and has less interest in the fate of the common man.

Wall Street has been calling for simplification of the rules around capital adequacy, which are seen as holding investment back.

Jamie Dimon, the CEO of JPMorgan Chase, spoke yesterday of his fears that the country may not be threatened by a recession he feels that there could be a period of stagflation.

I think there's a chance you'll have stagflation," Dimon said, adding that he's not predicting such a scenario necessarily but that he wants to be prepared.

"I think global fiscal deficits are inflationary. I think the remilitarization of the world is inflationary. The restructuring of trade is inflationary," he added, while also noting that the sharp decline in oil prices could be a deflationary offset.

The JPMorgan boss also said he thinks the Federal Reserve was right to hold rates steady, given the risks to inflation from loosening monetary policy too early. The US central bank has kept interest rates unchanged this year, despite calls from President Donald Trump to lower borrowing costs.

The dollar continues to suffer from the uncertainty caused by the possible imposition of tariffs. The ninety-day hiatus announced by President Trump last month, far from calming volatility, has seen it increase since a decision has simply been “kicked down the road”.

The index attempted another assault on the 100 level yesterday, reaching 100.08, but fell back as traders took the opportunity of reacting to a lack of follow-through to establish short positions.

Services output, which has supported the economy during times of falling manufacturing output, appears to have hit the buffers just as manufacturing is staging a comeback, even though it is from a far lower base.

Even before tariffs were announced by President Trump, actions in anticipation of their implementation led to big swings in economic activity.

Business activity in Europe and Japan declined in May, while the U.S. saw a rebound as changes in tariffs continued to have unpredictable consequences for the global economy, according to surveys released yesterday.

Business activity in the eurozone fell in May, reflecting the worsening downturn in the services sector. Preliminary Services PMI dropped to 48.9 from 50.1 in April and was shy of the market estimate of 50.3. This points to contraction and was the weakest level since January 2024. Business confidence fell to its lowest level since Sept. 2022, as the outlook for domestic and foreign demand remains grim.

Germany, the largest economy in the eurozone, is in even worse shape. The Services PMI dropped to 47.2, down from 49 and below the market estimate of 49.5.

The services sector has traditionally been the engine for growth in the eurozone and the eurozone and with services in contraction in both Germany and the eurozone, a recovery seems a long way off. Manufacturing PMIs showed a slight improvement in Germany and the eurozone in May, but both remain in contraction, with readings below the 50 line.

The weak PMI numbers provide support for the European Central Bank to lower rates at the June 5 meeting. The ECB lowered rates to 2.25% from 2.4% in April, but will have to be cautious in the turbulent economic environment.

The boost provided by the announcement of the creation of a 150 billion euro fund by Germany to invest in defence and infrastructure has faded as the understanding has grown that it will only have a marginal effect on the Eurozone economy before the middle of next year.

The new German government wants to revive the German economy by introducing an urgent recovery program. However, the crisis is so severe that economic experts see little chance of a rapid upturn.

In 2024, more companies closed than in the previous major financial and economic crisis in 2011. High electricity prices have meant that energy-intensive industries have been hit especially hard. In addition, companies are having to close due to a shortage of workers and specialists as society is ageing. Germany's burgeoning bureaucracy is another major factor hampering business.

The new government has set out to improve the situation quickly and sustainably. But this will not come about overnight. This is the finding of the Federal Government's economic advisory body. In its spring report, the German Council of Economic Experts spoke of a "period of considerable sluggishness" and practically ruled out a rapid recovery.

In a massive change to the outlook, Germany has become a proxy for all that ails the industrial and manufacturing sectors in the European Union.

A decade ago, perhaps even longer, Germany was the shining light of what could be achieved by working as a single entity, but now Germany is seen as dragging the rest of Europe down with it.

The single currency continues to experience solid buying interest, every day, it seems to make higher lows than the previous day. Yesterday, it reached a high of 1.1310 before falling back to 1.1250, where buying interest reignited, pushing to a close of 1.1305.

Have a great day!