29 June 2026: Pill remains unsure of the effect of the Energy crisis

Bank of England Chief Economist Huw Pill was one of two members of the Bank’s Monetary Policy Committee who voted for a rate hike at the Committee’s most recent meeting.

Pill explained his concern that the Bank will take too much comfort from April’s dip in inflation, or over-interpret changes to the growth outlook.

Speaking at a business conference, Pill told delegates that his current hawkish stance is due to a fear that second-round inflation from the war in Iran has not fully fed through into the most recent inflation figures, and that he voted for a rate hike as a precautionary measure.

The next chancellor is far more likely to pursue growth through tax reform than through tax rises. This is exactly where the evidence points: broad tax rises depress growth, while structural tax reform can raise growth without increasing headline tax rates.

NIESR modelling shows that all major tax rises reduce GDP, with VAT hikes hitting growth hardest, and income-tax rises also having a negative effect. The Institute for Government analysis shows the Chancellor faces a “triple bind”: weak growth, high borrowing costs, and limited fiscal space, meaning tax rises alone cannot deliver growth.

Studies show that broad tax rises depress GDP. NIESR’s NiGEM simulations show that a VAT rise depresses growth by 0.87% of GDP in year one, while a Corporation tax rise cuts 0.15% from GDP. Income-tax rises are negative but smaller. All three options reduce growth.

Prime Minister “elect” Andy Burnham will set out his economic plans later, should he be elected to the role by the Parliamentary Party.

He will set out a commitment to a "10-year mission" to raise living standards, along with proposals on youth employment, to "lift Britain back up to where it should be".

If no other Labour MP puts themselves forward as leader, Burnham is expected to become prime minister on 20 July.

He has faced calls from opposition parties to set out his plans, confirm who he intends to appoint to his cabinet, and explain whether he will deviate from Labour's 2024 manifesto.

Any significant deviation from the 2024 manifesto will add fuel to calls for a General Election.

In this morning’s speech, Burnham is expected to say the government must "give Britain the circuit-breaker it needs" and to address why public trust in politics is low.

He will say decision-making needs to be "pushed to regions and local communities" and will promise "good growth in every postcode".

Burnham has signalled he will stick to the fiscal rules set out by Chancellor Rachel Reeves, whom he is expected to replace if he becomes prime minister.

Those rules stipulate that day-to-day government costs will be funded by tax income rather than borrowing, and commit to reducing debt as a share of national income by the end of this parliament in 2029-30.

Pressures on the government's budget and high borrowing costs mean Burnham will have little financial room to pursue policy objectives.

The pound saw significant selling interest last week as the Fed’s FOMC meeting, while reducing its advance guidance to markets, was seen as a pivot towards a more hawkish stance. The pound fell to a low of 1.3140 but recovered, ending the week at 1.13196.

Wall Street overwhelmingly expects the Federal Reserve to hike rates later this year, but a few contrarians still insist the opposite will happen.

According to CME’s FedWatch tool, investors have priced in 77% odds that the Central Bank will lift the benchmark rate by a quarter-point or more by the end of the year.

That’s because the U.S.-Israeli war on Iran sent oil prices soaring, while the recent ceasefire hasn’t seen an equivalent dive in costs. In addition, the AI boom has created a chip shortage that’s driving up consumer electronics prices.

Meanwhile, GDP was revised higher, the job market has also firmed up, and tech giants are signalling that monetary policy isn’t that restrictive. And for good measure, Kevin Warsh’s first press briefing as Fed chairman last week stunned Wall Street with his hawkishness, clinching the case for tightening.

On Friday, analysts at Bank of America predicted the Fed would raise rates three times this year as policymakers take more decisive action to rein in inflation after five years of inflation above their 2% target.

On the other side of the argument, there are holdouts like Andrew Hollenhorst, chief U.S. economist at Citibank Research, who has long maintained that monetary policy will get looser.

“In contrast to market pricing, we continue to see data and developments as pointing towards an economy that, rather than rate hikes, is more likely to require rate cuts,” he wrote in a note last week, listing reasons why Wall Street is all wrong.

On oil, for example, the market has rapidly swung from shortage to surplus, removing the key upside risk to inflation.

And even though first-quarter GDP growth came in stronger than initial estimates, Hollenhorst pointed out that real consumer spending was revised down to a multi-year low. The AI boom also obscured uneven gains. Excluding investment in computers, electronics, and intellectual property, growth would’ve been just 0.5%.0.5%.

An escalating new round of strikes between Iran and the US has continued, further undermining the fragile interim peace agreement between the two countries and prompting Donald Trump to threaten violence that would ensure Iran “will no longer exist”.

On Sunday, Tehran launched drone and missile attacks against Bahrain and Kuwait after new US strikes on sites in southern Iran, and threatened a “complete halt” to negotiations to end the war. Trump said that a moment might soon come when he would abandon talks, and the US would “militarily finish the job”.

The US President posted on social media: “If that happens, the Islamic Republic of Iran will no longer exist!”

Earlier on Sunday, Kuwait, which hosts a major US army base, said it had intercepted two ballistic missiles and that there were no reports of injuries or damage. In contrast, Bahrain’s interior ministry said the Iranian strikes had damaged a residential building near the international airport and that no one had been injured.

Qatar’s interior ministry said one Qatari national had been killed and a second person injured by shrapnel from “military operations in the area”. The two were on a boat that went missing on Saturday and was located early on Sunday.

The ministry did not give the location of the incident and did not say whether the shrapnel was linked to the Iranian drone attacks.

However, late yesterday, a US official said that both sides had agreed to halt recent hostilities and to renew talks over the Strait of Hormuz. “Technical talks are slated to continue on all areas of the MOU. Both sides will stand down for now, and vessels can move freely,” the official said, referring to the 14-point memorandum of understanding that was agreed earlier this month and under which the strait would be reopened for traffic.

The dollar gained significantly last week as Q1 GDP was raised again and the Fed made a hawkish pivot. The dollar index rallied to a high of 101.80 but then ran into selling pressure, closing at 101.36.

Isabel Schnabel, a member of the European Central Bank Executive Board, warned on Saturday that inflationary pressures in the Eurozone could be higher than expected, even after the United States and Iran signed a memorandum of understanding (MoU) to reopen the Strait of Hormuz.

Speaking at a panel discussion in Königswinter, Germany, Schnabel noted that "food, goods, and services inflation are facing upside risks." At the same time, the "energy price shock can feed into broader inflationary dynamics." Earlier in the week, ECB Chief Economist Philip Lane also warned of inflationary pressures in the coming months, despite the US and Iran reaching a ceasefire.

Euro area consumers lowered their inflation expectations for the next 12 months in May, the European Central Bank said on Friday.

The median outlook fell to 3.5% from 4.0% in April, while perceived inflation over the previous year remained unchanged at 4.0%. The ECB's Consumer Expectations Survey showed that inflation expectations for three years ahead stayed at 2.9%, while the five-year outlook was unchanged at 2.4%.

Consumers also expected nominal income growth to rise to 1.0% over the next year, from 0.8% in April, while expected spending growth fell to 3.8% from 4.3%.

The European Central Bank’s decision to raise interest rates was “robust”, given that inflation will stay higher for longer, according to Vice President Boris Vujcic.

At the same time, most longer-term expectations of future price gains remain in line with the ECB’s 2% target, and wage growth doesn’t currently point to any ripple effects, he said last week.

“Both headline and core will remain higher for longer, possibly into Q2 2027,” said Vujcic, who took over as the ECB’s No. 2 from Luis de Guindos earlier this month. “And this is basically underlying the rate policy move you’ve seen at the last meeting.”

The ECB’s Governing Council lifted borrowing costs by a quarter-point on June 11 and is weighing whether to follow up with further tightening in the coming months.

They are concerned that war-driven inflation, currently at 3.2%, is widening beyond energy. At the same time, they don’t want to impose an undue burden on economic activity that’s already slowing.

Vujcic described growth as “relatively resilient” as the 21-nation euro zone navigates yet another supply shock following Russia’s invasion of Ukraine.

French far-right leader Marine Le Pen sided with Italian Prime Minister Giorgia Meloni after Meloni traded barbs with U.S. President Donald Trump in a public spat.

The Italian leader shot back at the American President after Trump mocked her for supposedly “begging” him for a photograph at a recent G7 meeting. He also accused her of exploiting their relationship for domestic political gain. Meloni said Trump made up the incident and told him to mind his own business.

“He was very insulting, so I fully understand Giorgia Meloni’s reaction, which is one of national pride,” Le Pen said in an interview with French radio France Culture. “Is this a definitive break between the two nations? Certainly not. Is this a severe cooldown of the relationship between the two individuals? Most certainly,” she added.

Some figures within Le Pen’s far-right party, the National Rally, have expressed admiration for Trump and his political instincts, but have recently withdrawn from being so openly supportive of his actions domestically.

The Euro has fallen into a lower range as markets have come to view the Fed as more hawkish than the ECB since the two central banks' most recent monetary policy meetings.

The single currency fell to a low of 1.1324 and closed at 1.1384.

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