28 August 2025: New EU energy tax set to hit Britain on 1 January

There have been a large number of column inches dedicated to speculation about the state of the economy over the entire summer. It is easy to form an opinion about the performance of Rachel Reeves and her team at the Treasury, and analysts and commentators have done that and are now unshakeable in their belief that she is either driving the economy into the ground or forming a base that will be the foundation of a strong and thriving financial system going forward.

Of course, many of those opinions have their roots in political views that have been developed over several decades. It has long been considered that socialism will eventually lead to an economic recession due to its tax-and-spend dogma, whereas, until the final days of the most recent Conservative Government, a more capitalist Chancellor was believed to be more business-friendly.

Those attitudes have been turned on their heads as Reeves tries to live by a different set of rules in which daily expenses are matched by daily expenditures, only to see public sector borrowing spiral out of control. She has tied her own hands by promising that income tax, National Insurance and VAT would not be increased.

This has led to some vicious cuts in public services, which are most “unlabourlike”.

Now, as she prepares to come to the country again with her Autumn Statement, the people who voted her and her Party into power are bracing themselves for more difficult choices.

Inflation has been a constant thorn in Reeves’ side, forcing the Bank of England to keep interest rates at a restrictive level, even as the MPC considers easing the burden on borrowers.

It is challenging to form a clear opinion on the economy's prospects, as global issues such as the introduction of tariffs on U.S. goods exports and the lingering effects of Brexit pose difficult-to-resolve problems.

Sir Keir Starmer may have “missed a trick” by not considering another Brexit referendum, even a watered-down version now that more of the facts and effects of the UK’s withdrawal from the European Union are better understood.

While Christine Lagarde lauds the benefits of immigration, the lines between legal and illegal migration have become blurred. This has seen the rise of populists like Nigel Farage, who outlined his plans to deport up to 600,000 illegal migrants earlier this week, only to backtrack on some of his more radical proposals the following day.

The question of what the spark will be that will see the economy flourish is not easy to answer. Several issues will need to be resolved to allow growth to return, and many of those are outside Reeves’ control, and the electorate will most likely have to continue to suffer short-term pain while accepting Reeves’ promises that things will improve in the future.

The Government’s approval rating continues to plummet, falling below 20% in the latest polls.

The pound is having a strong week following its fall on a holiday-driven market on Monday, although it is yet to reach positive territory for the week. It climbed to a high of 1.3502 yesterday and closed at 1.3482.

The fight to see interest rates cut has entered a second round as President Trump has seemingly abandoned his plan to see Fed Chairman Jerome Powell leave office before the end of his term and has moved on to trying to weaken his position from within.

It is interesting to note that the Presidents of the twelve Regional Federal Reserve Banks are highly supportive of Powell’s stance and also his view of the economy. The minutes of the more recent FOMC meetings show that while they have voted as a block, their opinions are being watered down by members of the Fed’s Governing Board, who, once in place, have a permanent seat on the committee.

Trump can nominate Federal Reserve governors, and he has begun a clear campaign to replace as many as he can with his own people. Two such placements are Michelle Bowman and Christopher Waller. The latter is seen as many people’s pick to be Powell's eventual replacement. Adriana Kugler unexpectedly resigned earlier this year, and her replacement is yet to be named. Last week, Trump fired Lisa Cook for alleged mortgage fraud, although she intends to fight to remain in place.

It is unusual for Trump to settle for playing the long game, since it will take a considerable time for the FOMC to be swayed to Trump’s view. This is particularly ironic since the economy, particularly the jobs market, is “doing his job for him”.

In this speech at the Fed’s Symposium in Jackson Hole last week, Powell acknowledged that the labour market is superseding inflation as the main driver of monetary policy, adding to speculation that there may be a rate cut in September.

Powell also said that he sees the imposition of tariffs having a “one-off” effect on inflation, which will fade over time, while the decline in the state of the economy will need to be addressed using the fairly blunt option of monetary policy.

Trump, using his tried and tested blustering methods, has tunnel vision when it comes to the economy. Rates must be cut to encourage growth, while his own policies create inflation and lower activity, counter to the Fed's objectives.

The dollar index briefly rallied to a high of 98.73 yesterday but fell to close at 98.15 on fresh fears that the economy may be edging towards a recession.

Since returning from her summer vacation, ECB President Christine Lagarde has made several speeches in which she has praised the robustness of the Eurozone economy.

One is reminded of a famous line from Shakespeare’s Hamlet, "The lady doth protest too much, methinks".

Is this her genuine belief, or is she simply covering up her fears that the economy has been weakened by the imposition of tariffs on Eurozone exports to the U.S.?

“Higher US tariffs won't derail the euro-area economy, which is on the brink of a recovery”, European Central Bank (ECB) president Christine Lagarde said earlier this week.

In Jackson Hole last week, Lagarde also spoke up, defending Central Bank Independence. While she believes that Central banks are not strictly independent, their governors are, in fact, appointed by the political establishment, although they are also institutions protected by laws that recognise the autonomy and independence of their management.

This independence in decision-making has emerged in recent decades from a sort of separation of powers dictated by experience and the evidence that central banks that are not influenced by political pressure are more effective in fulfilling their mandate.

“Governments face multiple temptations: pushing to lower interest rates before elections in an attempt to artificially stimulate the economy, even if this generates future inflation; and, in more extreme cases, using the central bank to directly finance public spending through massive purchases of government debt or monetary issuance, which has historically led to devastating hyperinflationary processes.”

These political pressures do not really apply in the Eurozone, given its rather unique structure where 20 individual states each have their own preferences for monetary policy, and exerting pressure via their own Central Bank Governors, who clearly do face political pressure.

It is interesting to note that Germany, currently the weakest of the large Eurozone economies, is so fearful of runaway inflation that it remains one of the most hawkish states in the region.

German Chancellor Friedrich Merz is embarking on a major programme to revitalise the German economy through investment and doing away with economic reliance on heavy engineering, while leaving the Bundesbank alone to deal with monetary policy, which he, in any event, sees as a short-term measure that does not affect the longer-term strategy of his government.

The euro is still being driven by events surrounding the U.S. economy. Yesterday, it initially fell to a low of 1.1574, but rallied to close at 1.1671.

Have a great day!