29 May 2025: The Government’s borrowing costs are rising fast

Despite handing the UK a positive outcome from its review of the UK economy for 2025, the IMF voiced a degree of caution over the impact of tariffs on UK exports to the United States.

According to the global advisory body, trade tensions linked to US tariff plans are expected to reduce UK economic growth next year.

The IMF said an “economic recovery is underway” in the UK, with GDP, gross domestic product, set to increase by 1.2% this year.

However, economists at the body said this will come despite global trade tensions wiping 0.3 percentage points off growth for the year.

Trade tensions will weigh on growth through “persistent uncertainty, slower activity in UK trading partners, and the direct impact of remaining US tariffs on the UK”, the IMF said.

It also highlighted that there is a greater risk that growth could be weaker than expected, due to the potential that global trade uncertainty will impact supply chains and weaken private investment.

Meanwhile, it indicated that policy reforms by the UK government to overhaul planning rules and loosen regulatory hurdles could support future growth.

“The authorities’ structural reforms, including in planning, and the increase in infrastructure investment could increase potential growth if properly implemented,” its statement on the UK economy said.

Chancellor Rachel Reeves has made growing the economy a key priority for the government to help fund future spending plans.

Her plans to also reduce spending as part of her overhaul could see the Government’s popularity, already at a record low for a Government that is less than a year into a five-year term, plummet even further.

The suspended Labour veteran John McDonnell has called for a grassroots leadership challenge to the Labour government, warning that unless party members, unions and MPs “stand up and assert themselves to take back control of our party”, Labour risks losing not just its power: “We could lose the party.”

The former shadow chancellor accused Keir Starmer’s government of “callousness and political incompetence”, criticising its hesitance in abolishing the two-child limit on benefits, and what he calls a “brutal launch of an attack on the benefits of disabled people”.

The Chancellor has been warned that despite the positivity of the IMF report, the country’s borrowing costs are rising to their highest level since the financial crisis.

Thirty-year gilt yields have now climbed to their highest since the early 1990s. This has been seized upon by the opposition as a warning. Servicing the national debt already costs nine billion pounds a month. That staggering amount will only increase as, despite saying that she is trying to fill a black hole in the economy, Rachel Reeves is simply creating another one.

The pound lost ground, falling to a low of 1.3416 yesterday. There was no particular reason for this other than a marginal revival in the fortunes of the dollar.

The Head of the Administration appointed Federal Housing Finance Agency, William Pulte, like President Trump, who tapped him for the role, is pushing for Federal Reserve chair Jerome Powell to cut interest rates.

"Jay Powell needs to lower interest rates, enough is enough. President Trump has crushed Biden’s inflation, and there is no reason not to lower rates. The housing market would be in much better shape if Chairman Powell does this," Pulte declared earlier this week.

It is hard to attribute the fall in inflation recently to Trump’s policies. Indeed, the reason that FOMC members retain a cautious attitude to rate cuts is their view that the imposition of tariffs on U.S. imports will see inflation increase in the coming months.

Pulte’s comments were widely reported on Trump-supporting media, which has become a common theme since January.

A majority of economists believe US trade policy will have a “lasting impact” on the global economy. That’s according to the World Economic Forum’s latest survey of chief economists.

The snapshot of opinion recorded in early April, just after US President Donald Trump’s Liberation Day tariff announcement, found that most economists, 77%, were anticipating “weak or very weak growth” through 2025 in the US, alongside high inflation and a weakening dollar.

“By contrast, they were cautiously optimistic about Europe’s prospects for the first time in years, mainly because of expectations of fiscal expansion, notably in Germany,” the report noted.

The outlook for China remains muted, with chief economists divided over whether the country can reach its target of 5% GDP growth this year. In I’m

Overall, economists see Washington’s protectionist pivot and on-off tariff threats as delaying strategic business decisions and increasing recession risks, the report said.

Debt sustainability was also pinpointed as a concern, cited by 74% of respondents for both advanced and developing economies.

An overwhelming majority said they expected the Administration to meet rising defence spending needs through increased borrowing, potentially crowding out investment in public services and infrastructure.

Artificial intelligence is expected to drive growth, but 47 per cent of economists anticipate it will result in “net job losses”.

The dollar index experienced a rally yesterday, created by its failure to break support in the previous session. It broke back above the 100 level, reaching a high of 100.54, but still looks a little brittle, which resulted in some profit taking that pushed it back to close at 100.04.

The ECB’s Chief Economist believes that the Central Bank’s Governing Council should keep its options open and not back itself into a corner by predicting further rate cuts in what is becoming a more and more unpredictable global economy.

Philip Lane believes that it is going to be far from a relaxing summer. He went on to say that the task of returning inflation to 2% is "mostly completed," adding that he expects inflation will remain around 2% in the upcoming months.

"I am saying 'mostly' because some final steps still need to be taken. For example, service inflation is still too high. But we expect it to decline in the coming months, as we think wage inflation is coming down, but unfortunately, new challenges are emerging," Lane disclosed in an interview for the Frankfurter Allgemeine Zeitung.

Speaking about the impact of the United States' tariff policy on inflation, Lane said that its influence could be prominent in the medium term, especially regarding exchange rates and energy prices. He concluded that there are no ongoing discussions about dramatic rate cuts, and that "we are in a realm of normal central banking."

There has been a rumour circulating within the ECB recently, possibly created by its members of staff who, according to polls would like to see her term cut short, that Christine Lagarde is in talks with the World Economic Forum to take over at its helm before the end of her official period term at the Central Bank.

Lagarde is widely expected to take over the running of the body that hosts the Davos event in February each year, but talk of ending her time at the ECB early has been widely denied by her office.

“European Central Bank President Christine Lagarde has discussed leaving her post early to take the helm of the World Economic Forum”, WEF founder Klaus Schwab told the Financial Times.

Schwab, who abruptly resigned as chairman of the WEF last month, spoke of his efforts to convince Lagarde to cut short her term at the ECB in an article published yesterday.

The ECB, though, said Lagarde was "determined" to finish her term, which ends in 2027, while a WEF spokesperson declined to comment.

"The WEF is not in any position to comment on possible confidential discussions that may have taken place between our former Chairman and Ms Lagarde," the forum's spokesperson said.

Schwab, 87, resigned as chairman of the WEF in April, and it later surfaced that the forum had launched an investigation into fraud allegations against him, which he denies.

The German-born business professor told the FT in an interview published Wednesday that he had discussed "for several years" plans for Lagarde to succeed him as head of the WEF.

The euro had a more sedate day yesterday, although it does seem to find the rarified air above the 1.13 level difficult to retain. It fell to a low of 1.1270 and closed within a few points of that level.

Have a great day!