30 July 2026: Inflation is unlikely to return to target during this Parliament despite OBR projections

The base case among market analysts is for no change in interest rates at today’s meeting of the Bank of England’s Monetary Policy Committee, with the base rate remaining at 3.75%. The latest data also reinforces that expectation.

The MPC has held the rate at this level for several consecutive meetings, with the voting pattern consistently 7–2 in favour of no change. Megan Greene and Huw Pill remain the likely dissenters. There is also a remote possibility that independent member Alan Taylor may vote for a rate cut.

There are several reasons for the favoured outcome: CPI fell to 2.8%, but the Bank expects it to climb back above 3% later this year as energy costs feed through. The Middle East conflict continues to distort oil and gas markets, making the inflation outlook uncertain.

The Bank cannot influence global energy prices, so it is focused on preventing second-round effects.

Demand for workers is subdued, reducing wage-pressure risks, which are a significant source of second-round effects. Meanwhile, financial conditions are already tight. Higher mortgage rates and borrowing costs are already slowing economic growth.

There is now a case to be made for the base rate to remain at its current level for the remainder of this Parliament.

This is a credible macro case. It rests on structural forces that would render further tightening unnecessary and make cuts politically and economically unattractive.

This isn’t a prediction of political behaviour but an explanation of the economic logic that analysts often highlight.

Keeping the Base Rate at 3.75% for the remainder of the Parliament would provide the Bank of England with stability, avoid re-stimulating inflation, and maintain credibility as the economy digests past tightening.

After the inflation shock of 2022–23, the Bank would benefit from demonstrating consistency and discipline, while Government borrowing costs are sensitive to rate changes; a stable base rate reduces volatility in gilt markets. With Parliament ending in 2029, the Bank may prefer a steady stance until inflation is clearly subdued and global energy markets normalise.

There is plenty of ‘water to flow under the bridge’ before a continued hold can become the base case, given that geopolitical volatility is at its highest for some time and the new Prime Minister continues to ‘tweak’ Labour’s manifesto commitments. The most obvious example is his comment on social care, which could have taxation implications.

Higher inflation is now expected to erode the real value of UK public spending by about £24 billion, according to multiple analyses by the National Institute of Economic and Social Research (NIESR).

This figure reflects how rising prices reduce the purchasing power of fixed departmental budgets, meaning that even if cash spending remains unchanged, the real resources available for hospitals, schools, welfare and defence shrink.

Without new funding, departments will deliver less even if nominal budgets rise. The NIESR estimates the Chancellor’s buffer has fallen from £7bn to around £3bn. In the meantime, higher energy prices and uncertainty could reduce UK growth by £28bn over two years compared with earlier forecasts.

The pound strengthened yesterday, with GBP/USD rising sharply while GBP/EUR held broadly steady. Across financial markets, sterling’s performance reflected a mix of global Central Bank expectations, geopolitical tensions, and month-end flows.

The Federal Reserve announced that it would keep the target range for the federal funds rate unchanged at 3.5% to 3.75%, marking the fifth consecutive pause in interest rate hikes.

However, a rare occurrence of three dissenting votes in favour of a rate hike emerged, underscoring rifts among policymakers. Market participants believe that this signal of division has a greater impact than the resolution itself and may indicate that upward pressure on tightening will persist.

Three regional Federal Reserve presidents cast dissenting votes in favour of a 25-basis-point rate hike, namely Dallas Fed President Lorie Logan, Minneapolis Fed President Neel Kashkari, and Cleveland Fed President Beth Hammack.

Although the outcome did not surprise all observers, given the past stances of these three individuals, their concentrated opposition nonetheless sent a strong signal of policy dissent.

Three dissenting votes are the most noteworthy signal from this meeting, indicating that pressure within the committee to raise interest rates may persist and that policymakers are beginning to turn towards discussions of tightening monetary policy.

Fed Chairman Warsh deliberately avoided providing forward guidance; the traditional post-meeting press conference now more often reflects the chairman’s personal views rather than the consensus of the entire committee. Against the backdrop of the President's unprecedented pressure for cuts, policymakers are using dissenting votes to signal their willingness to safeguard their independence.

It is entirely likely that a fourth Regional President, Austan Goolsbee, would also have voted for a hike, but he is not a voting member this year.

Kevin Warsh’s bare-bones communication style has left investors questioning his commitment to curbing inflation, increasing pressure on the new Federal Reserve chairman to back up his words with interest-rate hikes.

Within hours of his press conference after the Fed’s latest policy meeting on Wednesday, analysts at JPMorgan Chase & Co. moved up their call for a rate hike from the second half of 2027 to this December.

“He once again failed to specify how he intended to achieve his stridently asserted resolve on inflation,” JPMorgan’s Michael Feroli wrote. “We believe this will add urgency for the rest of the committee to act on its mandate.”

The decision was widely expected, and investors took it in their stride. However, Warsh didn’t offer a clear explanation for the move or say he would support raising rates if inflation fails to slow.

With August 1st falling on Saturday, the July jobs report won’t be published until a week from tomorrow.

This report will be one of the most closely watched releases of the summer, especially after June’s sharp slowdown. Based on the latest data and market commentary, the July print is expected to show continued cooling, with risks tilted towards another below-trend payroll number.

Markets and economists expect soft but positive job growth, likely in the 50k–120k range, with unemployment hovering around 4.2–4.3%. This expectation is driven in part by the June data, which showed a major deceleration: Nonfarm payrolls were 57k vs 115k expected. The unemployment rate was 4.2%, driven by a drop in labour force participation, and revisions lowered job creation by 74k, signalling weaker underlying momentum.

The dollar softened yesterday, with the U.S. Dollar Index slipping toward 100.80–101.00. The move reflected a combination of expectations for Fed rate hikes, stable risk sentiment, and position adjustments ahead of the FOMC meeting.

Ireland’s economy returned to growth in the three months to June, boosting hopes for a eurozone-wide pickup, where activity stagnated in the first quarter.

Ireland’s statistics office reported yesterday that gross domestic product was 3.9% higher than in the first quarter, driven by the information and communications sector. Ireland hosts the international headquarters of several large U.S. technology companies.

Europe’s most volatile economy contracted by 7% in the first three months of the year, a key factor in the eurozone's stagnation.

The European Union’s statistics agency will release second-quarter GDP figures for the eurozone later today, and economists expect a 0.2% expansion.

European Central Bank President Christine Lagarde noted last week signs of a pickup in activity in the three months to June, despite the rise in energy costs accompanying the conflict in Iran.

“Surveys suggest that activity in the services sector has partly recovered, after weakening markedly in the immediate aftermath of the energy shock caused by the conflict in Iran,” she said. “Digital services have been robust, in part owing to the increasing contribution from AI-related activity.”

Irish GDP figures are susceptible to large revisions that often affect the eurozone aggregate. For the first quarter, the Central Statistics Office initially estimated the economy contracted by 2%, then by 12.1%, before settling on a 7% estimate.

When its estimate stood at 12.1%, the eurozone economy contracted by 0.2%, accentuating the effect on the region as a whole.

After eight years in power, Pedro Sánchez, Spain’s socialist leader, has boasted of his government’s social and economic record amid a swirl of corruption scandals and a mounting political crisis.

Speaking at his final press conference before the summer break, Spain’s Prime Minister defended climate, social and labour policies, which he claimed have formed the cornerstone of Spain’s Socialist-led governing coalition.

With general elections scheduled for next year, the Prime Minister slipped into election mode, devoting a considerable part of his speech to attacking the main opposition, the People’s Party (PP).

“How would others have responded to these crises?” he asked, referring to the latest devastating wildfires that have ravaged thousands of hectares across central Spain.

On the economic front, the socialist leader reiterated strong macroeconomic data for the Spanish economy as proof of his administration’s “success”, with Spain’s GDP growing by 2.4% in 2026, according to the European Commission.

Meanwhile, Italy’s industrial sales rose 0.6% in May compared with the previous month, accelerating from a revised 0.3% increase in April, according to the latest data. The MoM gain signals a modest pickup in activity across the country’s manufacturing and industrial sectors, offering a cautiously positive signal for the broader Eurozone economy.

The 0.6% increase in May follows a period of relatively subdued growth. The April figure of 0.3% had already marked a recovery from March's flat performance. While the May acceleration is welcome, it remains below the historical average for pre-pandemic expansions, suggesting that the industrial recovery is still fragile. Analysts are watching these figures closely, as they provide an early indicator of the broader economic health of the Eurozone’s third-largest economy.

The euro was slightly weaker yesterday, with most major EUR crosses recording modest declines. The move reflected a combination of mild dollar strength, stable risk sentiment, and market anticipation of Eurozone inflation data.

Have a great day!