31 December 2025: The BoE will not find any reason to keep rates at this level

The UK should be one of the more stable countries economically in the developed world, with a Government that has a significant majority in Parliament and several years before the next General Election. The fact that that is not the case is almost exclusively due to the almost trial-and-error methods Sir Keir Starmer and his Cabinet have adopted since winning the 2024 election.

Given the number of U-turns that have taken place where policy decisions have been reversed, the electorate is entitled to ask, “who is actually running the country?”

2026 is going to be a crucial year for the Prime Minister. There is still a doubt that he will still be PM at the end of the year, since an underground campaign is being run currently to oust him from power in favour of a more radical left-wing candidate. Angela Rayner’s name often crops up, even though she was forced from the Cabinet due to a scandal of the non-payment of tax.

The most likely flashpoint for the Prime Minister will most likely happen in early May. That is when local council elections happen, and there is a very real concern that the Government will take a significant beating with Reform UK currently a long way ahead in the polls.

The first MPC meeting of the New Year will take place on February 5th. This will be the first of four meetings at which the Bank’s monetary policy report will also be delivered. With inflation coming under control, having fallen from 3.6% to 3.2% when the latest data was published, it will become harder for the hawks on the committee to maintain their resistance to rate cuts.

The Pound had something of a rollercoaster ride in the final quarter of the year. It lost a significant amount of ground in October and made most of it back in December. It is likely to close the year firmly on the front foot, although the reasons for its strength lie more in Washington than London. The U.S. The Federal Reserve is expected to cut rates two or three times this year, which should see the dollar retreat further.

Yesterday, the pound fell to a low of 1.3449.confirming the recent high of 1.3530 as a short-term level of resistance. It closed at 1.3463 in another “low volume” day.

U.S. President Trump is not going to let up in his criticism of Federal Reserve Chairman Jerome Powell as he enters the final calendar year in charge of the U.S. Central Bank.

Yesterday, he launched a renewed attack on Federal Reserve Powell, accusing him of "gross incompetence" and threatening to sue him over the costly renovation of the Central Bank's headquarters. Powell’s supporters will likely point to the current renovations happening at the White House, although the President has sufficiently deep pockets to cover the cost personally.

The president defended his project to build a ballroom at the White House and contrasted it with the Fed's renovation, saying that, "We're under budget and ahead of schedule, and they've wanted it for 150 years. Think of it. The Federal Reserve building, two buildings, they don't know what they're doing. They're way over budget. I mean, most of this was built during the Biden administration."

Trump spoke at a Mar-a-Lago press conference alongside Israeli Prime Minister Benjamin Netanyahu and slammed Fed Chair Powell as a "fool." Powell, who was appointed as Fed chair by Trump in 2017 and was reappointed by then-President Joe Biden in 2021, will see his term as chair expire in May.

"'Too late', Powell, 'too late,' because he's always too late with interest rates, except before the election, it was too early because that was supposed to help her get elected. It had no impact; we won all seven swing states," Trump said.

Powell warned recently that the housing sector's struggles are likely to continue, with interest rate cuts unlikely to move the needle significantly to address challenges with inventory and affordability.

Powell spoke at a press conference last week after the Fed moved to cut the benchmark fed funds rate by 25 basis points for the third consecutive meeting. In his opening remarks, the chairman noted that "activity in the housing sector remains weak."

However, data for existing home sales surprised to the upside when it was also released last week.

President Donald Trump’s net approval rating in the final Economist/YouGov survey of 2025 is three points below where it was at this point during his first term and seven points below former President Joe Biden’s, as Americans’ views of the economy have weighed on Trump’s approval rating throughout the first year of his second term.

Trump ends the year with a 39% approval rating and 56% disapproval rating following a downward trend since the start of his second term linked to his handling of the economy, as more than half of poll respondents, 51%, said they believe the economy is getting worse (the latest survey of 1,550 U.S. adults was conducted Dec. 26-29 and has a 3.6-point margin of error).

Trump’s -17% net approval rating compares to a -14% net approval rating after the first year of his first term and a -10% net approval rating after Biden’s first year, according to the poll.

The American economy enters 2026 facing a dramatic shift in trade policy that shows no signs of reversing course. Average tariff rates have skyrocketed from around 2.5% at the start of 2025 to more than 15% as the year draws to a close, marking the steepest increase in modern history.

This transformation has unfolded during President Trump’s second term, with analysts warning that businesses and consumers should prepare for these elevated rates to persist throughout the coming year. While some minor adjustments may occur, the consensus among economists and trade experts points to a new normal in American protectionism.

Many small business owners now believe that Trump's use of tariffs to “punish” trading partners has backfired.

Trump made his final significant tariff adjustment in November, removing duties on select items including coffee, cocoa and certain agricultural products. Yet this move appears to be an exception rather than the beginning of a broader rollback. The administration has shown little appetite for substantial changes to its trade stance.

Yesterday, the dollar made back a significant part of the losses it had incurred over the past week. It rallied to a high of 98.27 and closed at 98.22 as traders squared positions for the year-end.

Resilience is a word that has been used many times this year as the Eurozone economy has managed to resist the tariffs, some threatened and some real, imparted by U.S. President Trump.

There is little doubt that the economy has fared better than the markets expected, with the single currency ending the year with something of a flourish as the Fed cut rates for the third time in its past three meetings.

U.S. rate cuts are likely to remain a theme for the first quarter of 2026, unless the Eurozone economy picks up and registers significant new growth as the effect of the lower rates and inflation remaining close to its 2% target provides the ECB with ammunition to drive the economy forward.

It is doubtful that the somewhat controversial accession of Bulgaria into the Eurozone will have any positive effect on the economy and may produce a “new drag” on resources.

If there were two words to describe the global economy in 2025, they would be "resilience" but also “fragility” The outcomes have generally been better than feared, especially in the wake of US President Donald Trump’s regular assaults on the rules-based international order. But cracks have been showing, and everyone has been cautious.

2025 will be known as one of cheaper money, with policy interest rates falling in most countries. Following the global tightening of policy after the world emerged from the Covid-19 pandemic, facing strong demand growth, supply restrictions and higher interest rates, 2024 and 2025 have been years of some normalisation.

Bulgaria's accession leaves only six of the 27 EU nations outside the currency union: Sweden, Poland, the Czech Republic, Hungary, Romania and Denmark.

The euro is "not just a currency but a strategic choice" that strengthens Bulgaria's position in Europe, Bulgarian Prime Minister Rosen Zhelyazkov said at a high-level conference in the Bulgarian capital, Sofia, in November.

At the same event, Christine Lagarde, President of the European Central Bank, said the euro adoption "bolsters Bulgaria's economic foundations, builds its resilience against global shocks and amplifies its voice in euro area decision-making."

The Euro enters the New Year very close to a significant level of resistance, although it lost some ground yesterday. It fell to a low of 1.1743 and closed at that level. Since a divergence in monetary policy between the ECB and Federal Reserve will continue through the first quarter, the single currency should have a realistic target of 1.20 by the end of March before the U.S. economy changes gear and sees more significant levels of growth.

Have a great day!