30 April 2026: Reeves £35 billion nightmare

At least two members of the Bank of England's Monetary Policy Committee are expected to vote in favour of raising interest rates later this morning.

Huw Pill, the Bank's Chief Economist, is expected to lead calls for a rate rise, according to several market analysts. The balance of voting is expected to be 7-2 in favour of leaving interest rates unchanged at 3.75%

BNP Paribas, Goldman Sachs and JPMorgan have all published market briefs in which they expect the most hawkish policymakers to push back against leaving interest rates unchanged. Pill has repeatedly warned that interest rates have been cut too rapidly over the past two years, from a peak of 5.25% in mid-2023.

In a speech last year, he said the Bank should have been more 'cautious' in its approach to trimming interest rates.

In 37 meetings he has attended, Pill has voted to raise interest rates 14 times and has backed reductions only twice.

By contrast, MPC member Swati Dhingra has voted to reduce interest rates in 17 of her 29 meetings.

External member Megan Greene is, according to the analysis, expected to join Pill in voting in favour of increasing the base rate.

Some economists believe Pill could argue at today's meeting that the energy price shock from the war in Iran could prompt a fresh inflation spike.

Both the OECD and the IMF have claimed that the economy would experience higher price growth than the average across G7 nations as a result of the war in the Middle East.

The news that the NIESR predicts a £35 billion “hit” to the UK economy from the war in Iran could be the final straw that leads to the Prime Minister “reshuffling” Rachel Reeves out of the role of Chancellor of the Exchequer, which she has held for almost two years.

The economy is now expected to grow by just 0.9% this year and 1% in 2027. Only if hostilities in the Middle East are resolved rapidly will the economy be around £35 billion smaller this year and next than previously forecast. If the crisis drags on, the think tank can see an “adverse scenario” in which the economy is £68 billion smaller.

In its latest World Economic Outlook, the IMF also delivered bad news for the UK: the energy shock from the war in the Middle East is set to hit the economy hard. The Fund also revised its 2026 growth forecast down to 0.8%, citing reliance on energy imports. The 0.5% reduction was the largest decline among advanced economies.

Reeves could be forgiven for feeling that the odds have been stacked against her from the start, even though she began, following Labour’s victory at the 2024 General Election, by blaming the previous Government for “all that ails” the economy. She has been loath to “play the hand she has been dealt”, always looking for a scapegoat for poor results from her policies.

The pound is likely to receive a boost from the result of today’s MPC meeting if Andrew Bailey produces an even mildly hawkish statement following the vote. Yesterday, Sterling fell to a low of 1.3457 and closed at 1.3475.

The Federal Reserve left the Fed Funds rate unchanged for the third consecutive time amid widespread inflation concerns stemming from the war in Iran. Chairman Jerome Powell, who presided over his final meeting as Chair, said he will continue as a Governor, further deepening the Fed's already growing division over interest rate decisions.

The Federal Open Market Committee decided to keep its key interest rate at 3.5% to 3.75%. Only pro-Trump Stephen Miron voted against the decision to freeze interest rates, arguing for a rate cut, which, in the current environment, appears absurd but may well have earned him the praise of the President.

Powell said, "I think the current policy rate is at an appropriate level and is quite close to the neutral rate," adding, "I looked at the neutral rate between 3% and 4%, which is slightly higher than the current 3.5%."

However, the statement was interpreted as a "hawkish freeze", with three members, Beth Hamack, Neil Kashkari and Lorie Logan, who agreed to freeze interest rates but opposed the monetary easing bias maintained in the statement.

Analysts have interpreted the outcome as a four-disenter result, with three hawks and a dove, but only Miran actually voted for a different outcome.

Attempts to reword it to a neutral position that leaves open the possibility of both a rate hike and a cut were rejected. Still, the Fed is increasingly concerned about growing inflationary pressure.

Powell said, "Since inflation has risen, core prices are 3.2%, and we don't know how much inflation will be due to the Gulf situation, the number of members who argued for greater caution has increased. The committee has decided that there is no need to revise the wording yet, but what happens in the next 30 to 60 days could completely change the wording."

In particular, there is a possibility of a rate hike due to inflation concerns caused by the war, but Powell said, "No one is asking for a rate hike at this time."

Powell also said he plans to remain on the Federal Reserve board after his term as chair ends next month "for an undetermined period of time," citing the "unprecedented" legal attacks by the Trump administration against the Central Bank.

"I worry these attacks are battering this institution and putting at risk the things that really matter to the public," Powell said at his press conference after the Fed decision.

Powell’s decision to stay denies President Donald Trump the chance to fill a seat on the central bank's seven-member governing board with his own appointee. The Senate Banking Committee earlier approved Powell’s successor as chair, Trump appointee Kevin Warsh, on a party-line vote. Powell would continue as a Fed governor, possibly until January 2028.

US Attorney for the District of Columbia Jeanine Pirro said on Friday that her office was ending its probe into the Fed’s extensive building renovations because the Fed's inspector general would scrutinise them instead. But she added that her office could reopen the investigation if "the facts warrant doing so".

Apparently, that didn't bring Powell the closure he felt was needed.

The President, who has been entertaining the King and Queen this week, has not yet commented on the Fed’s decision.

The dollar index rallied following the announcement, reaching a high of 99.05 and closing at 98.96.

Christine Lagarde will need to deliver a significantly hawkish statement later today, even though the ECB’s Governing Council is expected to leave interest rates unchanged, if Chief Economist Philip Lane is to get his wish for a stronger Euro to help calm rising inflation.

The rising cost of energy, with no end to the conflict in the Arabian Gulf in sight, is likely to drive inflation significantly higher over the next few weeks and months.

Policymakers are widely expected to postpone any decision until June, when they will be able to judge with greater confidence whether to raise interest rates to prevent a spike in energy prices from triggering a broader wave of inflation. Benchmark prices for both oil and gas in Europe are up by more than 50% from the eve of the U.S.-Israeli war on Iran.

Lane also observed last week that officials will be able to judge whether the current price shock is temporary only once there is clarity on how long the conflict lasts, which seems impossible while the standoff continues.

Data published since then has offered no cause for optimism. The European Commission’s monthly survey of businesses and households, released yesterday, showed confidence plunging across the board and provided a strong sign that businesses will raise prices in the coming months, fuelling inflation.

On Tuesday, the ECB’s own consumer survey showed a surge in inflation expectations, with households now expecting inflation of 4.0% over the next 12 months, up from an estimate of 2.5% in February. Three-year expectations jumped to 3.0%, well above the ECB’s 2% target.

Until the ECB is ready to make a decision, Lagarde and her colleagues are trying to strike a delicate balance: keep the threat of further rate hikes alive to protect their credibility, without triggering a market reaction that prematurely tightens financial conditions. The ECB’s quarterly survey of banks, released on Tuesday, showed lenders already reducing lending to new borrowers.

Germany’s inflation rate rose in April 2026, but at a slower pace than expected, offering some relief to policymakers as they assess the economic fallout from rising global energy costs linked to the conflict in Iran.

Consumer prices in Europe’s largest economy increased by 2.9% in April compared with a year earlier, according to preliminary data from the Federal Statistical Office. This is slightly higher than the 2.7% recorded in March, but lower than the 3.1% expected by economists in a Bloomberg survey.

On a monthly basis, prices rose by 0.6%, matching market expectations.

So far, there has been a curiously muted reaction to the inflationary prospects of the war in Iran. Normally hawkish members of the rate-setting committee, such as Joachim Nagel and Isabel Schnabel, have cautioned against raising rates too quickly, as inflation is both predicted to soar and to return to target rapidly should the conflict end quickly.

This issue remains: what will be the effect of an extended conflict, and once it is over, how long will it take for normality to return?

The Euro mirrored the movements of the dollar index yesterday, which is hardly surprising since it accounts for a significant share of the index. It fell to a low of 1.1661 and closed at 1.1677.

Have a great day!