2 October 2025: BOE’s Mann Says Policy Is Loose, Backs Keeping Rates at 4%

One of Boris Johnson's most significant failures as Prime Minister and Leader of the Conservative Party was his inability to push through his levelling up agenda. This is now a concern for the present government, as demonstrated at its annual conference, which concluded yesterday.

The Labour government aims for economic growth, but this will only happen by boosting the UK’s regions and nations, as well as London and the South East of England.

The UK’s economy is the most regionally imbalanced among industrialised countries. This has a damaging effect on productivity and economic performance, both key enablers of rising living standards.

Although “levelling up” is not part of the current government’s vocabulary, reducing the economic divide between London and the rest of the UK remains high on its agenda. However, levelling-up policies have been criticised for being fragmented and lacking coherence, particularly due to the emphasis on significant infrastructure investments.

Infrastructure is only one of many factors that play into the long-term productivity differences in the UK.

The lack of high-growth start-ups in the rest of the UK is significant. These businesses are primarily located in and around London, with a relatively thin spread across the rest of the country. In a list of the UK’s 100 fastest-growing companies, 36 are in London, with a further 15 in south-east England.

These rapidly growing companies make a disproportionate contribution to job creation, innovation and economic growth. A 2009 report found that 6% of high-growth firms create more than 50% of jobs. This proportion has remained stable over the years, even during times of recession.

One infrastructure project that will always be needed in the south-east is the £2.2 billion plan for a second runway at London’s Gatwick Airport, which has divided opinion over environmental concerns and its ability to kickstart the economic growth the UK so badly needs. Critics have said that the financial benefits are overstated and the ecological harms unavoidable.

These concerns, including those from leading economists, are an essential part of the debate. But they don’t tell the whole story. Looking at Gatwick’s northern runway proposal in particular, the evidence suggests that expansion can improve safety, reduce waste and deliver tangible benefits to travellers and the local community as long as it is managed responsibly, of course.

Gatwick is Europe’s busiest single-runway airport, handling more than 43 million passengers a year and around 260,000 aircraft movements on just one operational runway.

The b-word that dominated most of the conversations heard over three days in Liverpool was not "budget", but Burnham, the popular Manchester mayor who used the party gathering to not-so-subtly signal his availability should anyone in Labour fancy a change of leader. The other “B word”, budget, will need to provide some significant and widespread distractions if Starmer is not to face a challenge from the left towards the end of this year or the start of next.

Catherine Mann has no intention of letting up in the continued campaign for the Bank of England to keep interest rates on hold for the foreseeable future. She still favours making substantial cuts when the situation allows, but for now, “she prefers a longer hold, and making a bigger cut when you do to make it very clear that this is not in response to the financial markets or other things,” she said. “This is really about the UK economy.”

The pound rallied to a high of 1.3527 as the market showed its concerns about the U.S. Government. However, as soon as the U.S. markets opened, it began to lose ground as various commentators said they believed that the shutdown would be short-lived. It lost most of its gains and closed at 1.3477.

The financial press continues to make light of the shutdown of the Federal Government, despite President Trump’s insistence that the government would begin firing federal employees within "one to two" days. White House press secretary Karoline Leavitt also told reporters that firings were “imminent,” blaming Democrats for the shutdown.

Several federal agencies' websites have posted partisan messages blaming Democrats for the shutdown, including the Department of Housing and Urban Development and the U.S. Forest Service, which declared that the government was shut down by "Radical Left Democrats."

It is unclear whether the September jobs report, due for release tomorrow, will be published on time; if it is, the markets may be concerned about its accuracy.

“If the shutdown lasts a week or two, I don’t think it will have a material impact on the economy and financial markets,” said Mark Zandi, chief economist for Moody's Analytics.

If a budget resolution isn’t reached quickly ― and a shutdown lasts a month or two, we’re talking about a totally different outlook.

“The heightened uncertainty and mounting concerns regarding the nation’s governance and safe haven status this would create would be difficult for stock and bond investors to ignore,” Zandi said.

Wall Street and Main Street tend not to perform well during extended periods of uncertainty.

On the one hand, we have faced the possibility of a government shutdown fairly often in our lifetimes. A shutdown, for example, was narrowly averted back in 2023, just hours before the September 30 deadline.

But you have to go back nearly seven years to the last time Congress couldn't reach a deal, and we entered a time of similar uncertainty.

No one is surprised by the threat of a shutdown any more, as it provides the Senate with a chance to exert some control over the President, regardless of the colour he represents, which means conflict with a President like Trump.

Federal Reserve Bank of Richmond President Tom Barkin noted that while inflation and unemployment are off the mark, their chances of significantly worsening are low.

In an interview with Bloomberg Television, Barkin acknowledged that unemployment and inflation have deviated from their target but emphasised that the Federal Reserve remains focused on stabilising prices while supporting maximum employment.

Barkin commented, “We’re very much focused on trying to land the plane here and balancing inflation and unemployment. Both of them have ticked in the wrong direction, but on the other hand, the downside is limited, and we’re just going to have to adjust our stance as we learn more.”

Barkin’s recent remarks came before the release of the latest Personal Consumption Expenditures inflation data. He is not a voting member of the FOMC this year and has not yet indicated if he would endorse an interest rate cut at the central bank’s October meeting. However, amid talk of both inflation risks and a crackup of the job market, Barkin said there were reasons to be “sanguine” about each.

He noted that two food processors in his district “each lost hundreds of employees” due to changes in immigration status, yet were able to refill those roles with minimal difficulty. Barkin said that these aren’t necessarily desirable jobs, and if they can be replaced quickly, the labour market is starting to show signs of strain.

The dollar index has not been significantly disturbed by the Federal Shutdown, but despite this, it lost ground yesterday. It fell to a low of 97.46 yesterday but steadied during the afternoon, closing at 97.74.

At the Bank of Finland’s International Monetary Policy Conference, ECB President Christine Lagarde underscored the growing importance of “geoeconomics” in shaping monetary policy, noting that trade wars and geopolitical tensions now significantly influence economic outcomes.

She highlighted that despite unprecedented US tariffs on European exports, the euro area has avoided major supply chain disruptions, partly due to limited retaliation, an appreciating euro, and strong domestic policy responses, including government investment and new trade agreements.

Lagarde emphasised that while inflationary pressures remain contained, trade shocks could impact potential growth, real interest rates, and monetary policy space. She stressed the importance of agility, thorough scenario analysis, and structural reforms, such as advancing the Single Market and promoting AI adoption, to enhance resilience.

Drawing on Finland’s tradition of sisu, she concluded that sustaining economic stability requires determination, adaptability, and vigilance in the face of ongoing uncertainty.

Eurozone inflation accelerated last month, driven by rising prices for services and a smaller decline than expected in energy costs, which likely reinforces bets on the ECB keeping interest rates on hold for some time.

European Central Bank chief economist Philip Lane said he doesn’t see any significant risks to inflation in either direction, suggesting he and his colleagues may be happy to leave interest rates where they are for the time being.

“It doesn’t look like we’re going back to the pre-pandemic equilibrium of very low inflation,” Lane told a panel discussion Monday in Frankfurt. But neither does it appear that there are “substantial risks of remaining noticeably above the inflation target either.”

Comfortable with the growth of consumer prices, the ECB left borrowing costs at 2% for a second meeting this month and is expected to do so again in October. Investors and economists no longer predict cuts beyond the eight already enacted this cycle.

“We do have this assessment of the inflation outlook, which is reasonably benign at this point,” Lane said. He argued that a convergence toward 2% instead of a plunge below is “plausible” due to robust demand. A recovery in real wages is stoking consumption while interest rate-sensitive sectors are only starting to respond to lower borrowing costs, and there’s more fiscal support than usual, Lane said.

Friedrich Merz, who once presented himself as the last line of defence against debt madness, is now set to push Germany’s new debt into the trillion-euro range. This program will accelerate the country's economic decline, according to some more conservative German economists.

The Chancellor vowed on Wednesday to make Europe's largest economy competitive again after the cabinet approved measures aimed at reducing bureaucracy and making it quicker and easier to do business through the use of AI and digitisation.

France must overcome its political impasse to tackle a debt burden that risks suffocating the economy, the head of the country’s central bank said. Bank of France Governor Francois Villeroy de Galhau said concerns over high debt and deficit are weighing on corporate investment and hiring, and pushing consumers to save rather than spend.

Regarding the wider Eurozone, Villeroy de Galhau believes that further policy easing may be forthcoming, but an equilibrium currently exists between the risks of inflation and growth.

The euro gained as the dollar lost ground in reaction to the Federal Shutdown in the U.S. It rallied to a high of 1.1778, but ran into selling pressure as the dollar recovered and closed lower on the day at 1.1730.

Have a great day!