28 May 2025: The IMF urges Reeves to ‘refine’ her fiscal rules

Nigel Farage, the Leader of Reform UK, has been considered little more than a disruptor in UK politics, with few believing he has any chance of being elected Prime Minister. He has built a political career based on his intense dislike of the European Union and the wasteful methods he saw in Brussels as a member of the European Parliament.

The UK electorate treated the European elections similarly to the way local council elections are viewed pre-Brexit, but, since the complete implosion of the Conservative Party at last year's General Election, Reform appears to be being considered as a credible right-wing alternative to the Labour Party.

Farage made a speech yesterday that would have been derided as little more than propaganda in the past, as he set out a series of policies that his Party would adopt if/when it came to power, the most headline-grabbing of which was a pledge to do away with the two child cap on befits to families.

This was introduced in 2017 by the then Conservative Government, and has been a controversial measure that it was thought would be reversed at the earliest opportunity by Labour.

However, despite a high level of expectation, each time Rachel Reeves confirms her budget plan, the policy remains in place, even though left-wing backbench members of Parliament view it as a totem for their agenda.

Now, remarkably, Nigel Farage has announced that should his Party win a future General Election, it would scrap the two-child rule.

When quizzed by reporters yesterday about the cost of such a reversal, Farage typically told them that his speech was designed to let the public know he intended to do so, and the cost of such a measure would be funded by the reversal of another Labour “flagship”, net-zero.

Farage has become a Trump-like figure in British Politics who “paints” with broad strokes, which grab the public’s attention. It is moot whether he fully intends to commit to such a radical, social charter, but in the short term, if Reeves funds the funding for such a reversal or not, Farage will be able to claim it is his idea.

The IMF completed its mission to assess the UK economy recently, and in its report, it upgraded its estimate for 2025 GDP to 1.2%, commenting that an economic recovery is underway.

Chancellor, Rachel Reeves, said: “The UK was the fastest growing economy in the G7 for the first three months of this year, and today the IMF has upgraded our growth forecast. We’re getting results for working people through our Plan for Change, with three new trade deals protecting jobs, boosting investment and cutting prices, a pay rise for three million workers through the National Living Wage, and wages beating inflation by £1,000 since the election.

The pound reacted positively to the news from the IMF, although it is difficult to isolate one factor from the myriad drivers of the currency market that exist currently.

It reached a high of 1.3562, short of the highs of the previous day, as liquidity returned after the holiday, and closed at 1.3511.

The FOMC is currently split into two distinct factions, even as both have similar goals.

The members of the Fed’s Governing Board, like Christopher Waller and Michelle Bowman, have become far more vocal in recent months and believe that monetary policy should be driven by the regulation of markets, which removes some of the excesses that have been seen on Wall Street in the past.

Meanwhile, Regional Fed Presidents who rotate their voting membership of the Committee think that monetary policy should be decided based on the current economic situation to comply with the Central Bank’s mandate to promote growth through job creation, while being mindful of inflation.

Regional Fed Presidents like Austan Goolsbee in Chicago and Neel Kashkari in Minneapolis, along with their colleagues in ten other cities, have seemingly been coordinating their comments on inflation, tariffs and the other economic drivers to present a united front in the face of President Trump’s often insulting comments about the institution and the seemingly constant threat to its independence.

Yesterday, Kashkari, who does not have a vote this year, along with Hammack, Logan and Harker, called for interest rates to be kept steady until there is more clarity on how higher tariffs affect inflation, warning against "looking through" the impact of such supply price shocks.

The shock to the economy from President Donald Trump's sweeping tariffs and uncertainty over U.S. trade policy are forcing central banks to decide whether to focus on fighting inflation or supporting economic activity, he said.

There is a 'healthy debate' among the Fed policymakers on whether to 'look through' inflationary effects of new tariffs. ‘Personally, I find arguments against looking through tariff-induced inflation more compelling, ’ he said. These arguments support the stance of maintaining the Fed's policy rate until there is more clarity on a path for tariffs, their impact on prices and economic activity.

President Trump’s bombshell announcement that he planned to increase the tariff on imports from the European Union due to their intransigence in “coming to the negotiating table” has added further to the flames of uncertainty.

Kashkari’s speech backed up the comments made by Austan Goolsbee at the weekend when he said, “Before committing to significant investments or other choices, US businesses were looking for continuity in trade policy”. He added that President Donald Trump's latest threat of 50% tariffs on European Union goods was a "scary" possibility for supply chains.

The dollar continues to be whipsawed by constant policy changes to such an extent that it is difficult to “see the wood for the trees”, as traders have no clue as to long-term direction, which is making investors jittery about committing.

The index recovered yesterday, having opened at 98.79, it rallied to close near its high of 99.75.

As her colleagues have infected markets with their views that the Euro is still some way away from being a viable alternative to the dollar as a global means of exchange, ECB President Christine Lagarde channelled her inner Donald Trump yesterday, telling reporters that the currency is being presented with an opportunity to make great strides.

Lagarde believes that the euro can become an alternative to the dollar, bringing enormous benefits to the bloc. Against this background, she called on governments to strengthen the EU's financial architecture and security system.

Global investors have begun to reduce their holdings of dollar-denominated assets, with most preferring gold and not considering other alternatives. According to Christine Lagarde, this is the wrong approach in the current situation.

She drew attention to the fact that the global role of the euro has not changed for several decades, as the EU's financial institutions are scattered. Moreover, EU governments do not show much desire to move towards further integration. "The changes that are taking place create an opportunity for the global growth of the euro. The currency will not be influenced by default, it will have to be earned," she emphasised.

Meanwhile, ECB Chief Economist Philip Lane chose to discuss the more mundane daily rigours of the economy, expressing confidence that services inflation will continue to moderate, citing subdued outcomes in recent wage agreements.

Speaking at a lecture, Lane noted that the current wage settlements for 2025 are already “quite low,” with those for 2026 appearing even more restrained. That suggested easing cost pressures in the services sector, a key driver of core inflation. However, he tempered optimism by pointing to the persistent volatility in the global economic environment. He highlighted large recent swings in exchange rates and energy prices, attributing them to structural shifts in the global trading system.

There were also comments from perennial ECB hawk, Robert Holzmann, who said that the time has not yet come for further interest rate cuts, pointing out that the European Central Bank should suspend any new steps to reduce interest rates until at least September.

Holzmann's remarks came in an interview with the Financial Times, where he clearly expressed his rejection of any new move towards lowering interest rates during June and July, considering that such a move is unnecessary at this stage. He would prefer that ECB officials go on the summer break with clear thoughts of what will be needed to curb inflation and promote growth upon their return.

The Euro lost ground yesterday as the dollar bounced off long-term support. The single currency fell to a low of 1.1326 as markets came to grips with the threat of an increase in the levels of tariffs to be added to European exports to the U.S.

Have a great day!