3 July 2025: Starmer stands fully behind Reeves

There were dramatic scenes in the House of Commons yesterday as the Prime Minister refused to confirm that a visibly distressed Reeves would still be Chancellor of the Exchequer in six months.

Following the debacle of Starmer’s multiple U-turns to satisfy the threatened rebellion of large numbers of Labour Backbenchers, the Government’s Welfare Reform Bill is in tatters.

Although the Prime Minister gave her tentative backing, the “writing appears to be on the wall” for Rachel Reeves. Starmer is expected to consider a reshuffle of his Cabinet, with Reeves and Work and Pensions Minister Liz Kendall being two major figures whose jobs are at risk.

Starmer will want to distance himself from the wreckage of his first year in power, the anniversary of which is tomorrow.

The five billion pounds in savings expected to be derived from Welfare Reform will now have to be found elsewhere. This means higher taxes, spending cuts elsewhere or further borrowing.

Spending cuts may be difficult to achieve, given the obvious militancy of Labour MPs who have “thrown down the gauntlet” for Starmer to be a more “Labour” Prime Minister. Traditionally militant Labour figures like Jeremy Corbyn and Dianne Abbot will be secretly revelling in seeing Starmer squirm.

Former Labour MPs, now safely ensconced in powerful positions in local government and having little to do with benefits, can taste blood in the water. They are using their national profiles to make life as difficult as possible for their party leader.

Last week, it was London Mayor Sadiq Khan who encouraged Labour MPs to rebel over the cuts. And now another aspiring party leader, Manchester’s Andy Burnham, has helpfully put the boot into the Government too, urging his former parliamentary colleagues to continue their rebellion.

Professor Alan Taylor, an independent member of the Bank’s Monetary Policy Committee, has said interest rates should be cut three more times in 2025 as he cautioned the inflation outlook was at greater risk of being pushed "off track" amid global trade woes.

It is generally accepted now that one cut is equal to twenty-five basis points.

Attending the ECB’s annual event in Sintra, Portugal, Taylor commented that rates need to come down at a faster pace, given the "deteriorating outlook".

Taylor was outvoted in calling for a quarter-point cut in June, with the majority of the MPC deciding to keep rates on hold at 4.25%. The Bank had reduced rates in May by a quarter point, down from 4.75%, but Taylor had voted for a steeper half point cut.

Taylor received a little support from the less dovish Governor of the Bank of England, Andrew Bailey, who reiterated his forecast that interest rates will continue to fall “gradually” as the jobs market softens.

Bailey said he was seeing signs of a softening labour market, which would help lower inflation towards the Bank’s 2% target, from its current 3.4% rate. This, in turn, would give rate-setters the confidence to lower borrowing costs.

The pound had its worst single-day performance since mid-May. It fell to a low of 1.3562, although it recovered to close at 1.3637.

The director of the Federal Housing Finance Agency has called on Congress to investigate and potentially remove Federal Reserve Chair Jerome Powell over his testimony about renovations to the Fed's headquarters.

FHFA Director Bill Pulte is one of President Trump’s acolytes and has been used in the past to attack Powell when the President needs to be backed up.

Trump himself called yesterday for Powell to leave his role voluntarily. "'Too Late' should resign immediately!!!", Trump said in a post on his Truth Social platform. He also included a link to the comments by Pulte.

Trump nominated Mr Powell to be the Fed chair during his first term. Since then, he has repeatedly criticized him for not cutting interest rates, but it's unclear whether the president has the authority to remove him from the post.

Despite the President's continued criticism of Mr Powell, he said earlier this year that he has "no intention of firing him".

Trump wants the Federal Reserve to lower interest rates to help boost economic growth.

Mr Powell said on Tuesday in a barbed comment that the Fed would have cut rates already had it not been for the impact of Trump's tariff policies.

When asked during a meeting of Central Bankers in Portugal whether US rates would have been cut again this year if the administration had not announced its plan to sharply increase tariffs on countries around the world, Mr Powell responded, "I think that's right."

According to several commentators, if China’s leaders were sitting around plotting ways to undermine America’s long-term economic competitiveness and give Chinese companies a leg up in developing the technologies of the 21st century, it’s quite possible, even likely, they would do precisely what Senate Republicans voted to do on Tuesday.

DOGE cuts to federal agencies responsible for scientific research, such as the National Science Foundation and the National Institutes of Health, are already threatening America’s hard-fought edge in fields such as vaccine development, artificial intelligence and quantum computing.

But this bill, more directly, would wreck the U.S. economy. According to economists at the American University, “a 25% cut to public R&D spending would reduce GDP by an amount comparable to the decline in GDP during the Great Recession.”

The dollar may have set a base in place yesterday, as it rose for the first time in ten sessions. It rose to a high of 97.15 and closed at 96.78.

The Euro fell back after reaching a four-year high against the dollar yesterday. It reached 1.1815 but fell back to close at 1.1798. It may well be that a line in the sand has been drawn by traders and investors who now agree that the single currency is overvalued.

The ECB had signalled a pause in interest rate cuts following its most recent meeting, but comments, particularly from the more dovish members of the Bank’s Governing Council, indicate that the pause may last just one meeting.

With the annual exodus to the beaches of Southern Europe coming ever closer, ECB officials have much to contemplate as they consider whether the region’s economy is on the verge of a bout of stagflation.

Inflation picked up marginally in June according to preliminary figures, but so did unemployment, which rose from 6.2% to 6.3%.

In the major eurozone economies, unemployment rates remained relatively stable, except Italy, which experienced an increase from 6.1% to 6.5% in May.

The Italian unemployment rate has been volatile, though, and employment expectations in Italy have remained strong in recent months. Overall, southern European labour markets have been stronger in recent months and are expected to remain so in the months ahead.

As Germany’s economic malaise persists, the number of unemployed people has climbed by 7 per cent in June compared to a year before.

Currently, 2.9 million people in Germany are unemployed, corresponding to an unemployment rate of 6.2 per cent. Germany’s number of unemployed is 188,000 higher than a year before, according to data Germany’s Federal Employment Agency announced on July 1st.

As the ECB ponders if it has done enough to drive the economy forward, there are lingering doubts that a spark from one of the conflicts happening currently could reignite inflation.

It is only now that members of the Governing Council are considering the relationship between growth and inflation.

The 14% rise in the value of the Euro this year has had a significant effect on bringing inflation down, and should the single currency have reached the end of the road for its rapid growth in strength, the effect of a bout of relative weakness may see inflation back at 2.5% or even 3%.

No one is considering the Euro collapsing at present, but many investors see it as having no reason to be trading above 1.15 versus the dollar at the current point in the global economic cycle.

Have a great day!