28 July 2026: Rates are unlikely to be hiked this week or this year

The base rate of interest is very unlikely to be hiked this week. Every major data point and every credible forecast indicates the Bank of England will hold at 3.75% at the upcoming MPC meeting.

There is complete consensus in the Reuters poll of seventy economists. Not only do they expect the base rate to remain at 3.75% at tomorrow’s meeting, but they also expect it to stay there until mid-2027. This assumes that no significant event will arise to change the dynamics of the current situation.

According to the Financial Times, the new Chancellor of the Exchequer, John Healey, is under mounting pressure to raise taxes or find fresh savings as new spending commitments and the Middle East war threaten to shrink the chancellor’s fiscal buffer to as little as £7bn.

The flare-up in hostilities between the US and Iran has pushed benchmark gilt yields back above 5%, increasing the government’s debt interest burden, while Andy Burnham has already announced unfunded measures to support households and small businesses.

The combination of higher borrowing costs, new spending commitments and weaker growth forecasts is eroding the government’s fiscal buffer to a razor-thin level, down sharply from the £23.6bn in the latest official forecast in March.

When Burnham was formally confirmed as Prime Minister last week, the headroom had already fallen to just £10bn, according to Resolution Foundation estimates, under Rachel Reeves’ direction. If sustained, the rise in oil prices, gilt yields and interest rate expectations over the past week would further reduce the government’s headroom by £1.1bn, against its commitment to balance day-to-day spending with taxation.

Healey and Burnham will need to be highly creative in November's budget if they are to remain in a position to help with the cost of living, while adhering to their manifesto commitments on taxation.

The combination of a “Burnham bounce” and Nigel Farage’s mounting troubles has genuinely shifted public opinion. Multiple independent polls show Labour overtaking Reform UK for the first time in over a year, directly linking the surge to Andy Burnham’s first week in office and the simultaneous slump in Reform support.

Across several polls (More in Common, YouGov, Electoral Calculus), Labour jumped four points within days of Burnham entering No.10, while Reform fell two points. The latest vote share estimates are: Labour 28%, Reform 24%, and the Conservatives 22%.

This is Labour’s first lead since March 2025 and its highest vote share since late 2024.

Pollsters attribute the bounce to a rapid blitz of cost-of-living policies (VAT cut on electricity, £2 bus fares, business-rate relief), high-visibility media appearances, and a sense of renewed optimism.

More in Common summarised it bluntly: “Momentum is on the Prime Minister’s side”.

Of course, there is little Parliamentary criticism of Burnham at present, as MPs are away from Westminster enjoying the summer recess. There is no doubt that Burnham will face a tougher examination of his policies come the Autumn.

Sterling fell yesterday, weakening against both the US dollar and the Euro, as markets reacted to a sharp drop in oil prices and renewed UK fiscal concerns. The pound’s decline was modest yet meaningful: it broke below $1.33 for the first time since early July.

New orders for durable goods increased by a weaker-than-expected 0.3% MoM in June. However, it was the third monthly gain in four months, following an upwardly revised 4.0% decline in May (-4.5% initially) and an 8.5% advance in April. The April figure remained unrevised, according to yesterday’s advance report from the U.S. Census Bureau. The Action Economics Forecast Survey had expected a 2.1% MoM increase in June.

The year-on-year rate accelerated to +7.4% in June from -3.0% in May (+10.9% in June 2025), remaining positive since January 2025 except for May.

Excluding transportation, durable goods orders rose 0.6% (11.0% YoY) in June, marking the 14th straight m/m rise, after a 1.8% increase in May. Durable goods orders excluding defence grew 0.3% (5.7% YoY) following a 4.3% May drop.

Durable Goods are the most volatile of all the ‘activity’ datasets because they include ‘big-ticket’ items such as commercial aircraft and ships, as well as several defence-related items.

Transportation orders fell 0.2% in June, after a 13.5% drop in May and two successive MoM gains.

In addition to June’s MoM rebound in non-defence aircraft orders and a decline in defence aircraft orders, motor vehicles & parts orders slid 0.6% (+10.3% YoY), the first MoM slide since November, after a 1.1% May increase.

Donald Trump’s endorsement of Kevin Warsh has sharpened the U.S. interest-rate debate, injecting direct political pressure into an already divided FOMC. Markets now expect a more contentious FOMC meeting this week, with Trump pushing aggressively for rate cuts while several Fed officials argue for higher rates to contain inflation.

This is a rare moment: the Fed is split internally, inflation remains elevated, and the President is publicly leaning on the Chair he recently appointed. It has been many years since the FOMC had to do more than endorse its Chairman's vision for the economy, with several of its members disagreeing with the President’s call for lower rates.

In a speech in Michigan yesterday, Trump returned to the narrative that the U.S. should have the lowest borrowing costs globally.

He is again openly pressuring the Federal Reserve to cut interest rates. This is a direct and unusually forceful intervention into monetary policy, coming just days before this week’s FOMC meeting. The President clearly has no desire to participate in the pre-meeting blackout.

There is an unusual three-way split on the rate-setting committee: Hawks who want higher rates due to sticky inflation, Doves see room for cuts, while Chairman Kevin Warsh has avoided signalling his stance and submitted no forecast for 2026/7.

The US dollar slipped slightly yesterday, with the Dollar Index edging down about 0.06–0.07%, but overall the dollar remained firm and resilient ahead of today’s Fed decision.

The move was small since markets are essentially waiting for the FOMC.

Another ECB rate hike in September is now the overwhelmingly likely outcome of the next Governing Council meeting, based on Christine Lagarde’s latest guidance and a full set of grounded sources. The ECB is effectively signalling that, unless inflation improves markedly, tightening will resume.

Lagarde has stressed since last Thursday that the September decision is now hostage to energy prices, particularly in light of any renewed Middle East conflict. This has led to an abrupt reversal of earlier disinflation, while the full inflationary impact of the energy shock has yet to play out.

If oil stays elevated, a hike is almost guaranteed since it is difficult to imagine that there will be any progress in negotiations between the U.S. and Iran in the intervening period.

The European Central Bank’s latest monetary data tells a simple story: money is flowing more freely across the eurozone. Annual M3 growth, the broadest measure of money circulating in the euro area economy, rose to 3.2% in May 2026, up from 2.7% in April. Adjusted loans to households also ticked higher, reaching 3.1% annual growth, compared with 3.0% the previous month.

M3 captures cash, deposits, money market funds, and short-term debt securities. When M3 grows, more capital is available for spending, investing, and speculation.

This data arrives just days after the ECB hinted that rates will rise in September. Lending is expected to continue growing despite the threat of another rate hike, suggesting underlying demand is robust enough to absorb marginally higher borrowing costs.

Wildfires raging across France have hit the country's economy like "a thunderbolt," Economy Minister Roland Lescure said on Monday, as more than 13, 000 businesses were evacuated in the southwestern Gironde department.

Speaking after an emergency meeting at the Economy Ministry with local business representatives, Lescure described the fires as an ecological and social catastrophe with a serious economic impact on a region already under pressure.

Businesses directly damaged by the fires, as well as those indirectly affected by disruption across the fire- hit region, will be eligible for France's partial unemployment scheme, he said.

"We stand with them," Lescure said, adding that authorities and economic actors were fully mobilised to support affected companies.

He also said insurers would cover temporary accommodation costs for residents evacuated from their primary homes in the departments of Gironde, Landes and Var, even if their properties had not been damaged.

The coverage will extend for up to three weeks, depending on how long authorities prohibit residents from returning home.

Meanwhile, French broadcaster BFMTV reported that President Emmanuel Macron chaired an interministerial crisis meeting at the Interior Ministry to coordinate the government's response to the fires.

Meanwhile, in Spain, devastating blazes raging around Madrid, Ávila, Toledo and Castellón have displaced more than 100,000 people, exposed gaps in firefighting capacity and reopened a familiar feud between the political left and right.

The scale of the crisis is such that Prime Minister Pedro Sánchez's government has declared a national emergency, a legal move that enables the country's Ministry of the interior to coordinate all actions and resources at the national, regional and local levels.

The measure is notable because it has only been enacted once before, when the entire Iberian Peninsula suffered a massive blackout in April 2025. It is also a source of political tension, because the emergency declaration was made at the request of one of Sánchez's most aggressive critics, Madrid's centre- right regional president, Isabel Díaz Ayuso.

The euro strengthened slightly yesterday, rising against the US dollar and holding steady against the pound, supported by improved risk sentiment after oil price declines and easing geopolitical tensions.

Have a great day!