4 August 2025: A rate cut this week is under threat as Inflation concerns remain

The Bank of England’s Monetary Policy Committee meets later this week, with experts predicting a twenty-five basis point cut despite inflation having little chance of reaching the Bank’s 2% target this year.

A cut could release pressure on some mortgage holders, amid hopes that cheaper deals will enter the market if the Bank’s base rate is lowered further.

Interest rates have been steadily cut over the past year from a peak of 5.25%.

Economists think a slowdown in the UK jobs market could prompt the MPC to ease monetary policy.

Food inflation climbed higher for a sixth consecutive month in July, the British Retail Consortium said last week, warning that retailers would be forced to increase prices again if the government sought to steady the public finances by raising taxes in the autumn.

Sharp increases in the price of staples such as meat and tea drove the annual rate of food inflation to 4 percent this month, up from 3.7 percent in June and a three-month average of 3.5 percent, the industry association said.

The Treasury and Bank of England are creating conditions for a bout of stagflation. This condition occurs in conjunction with stagnant economic growth, high unemployment, and high inflation.

This situation poses a unique challenge for policymakers because the typical tools used to combat inflation (such as raising interest rates) can exacerbate unemployment and slow economic growth. In contrast, measures to stimulate growth, such as lowering interest rates, can exacerbate inflation.

Former Prime Minister Boris Johnson has labelled the European plan to recognise a Palestinian State as Ridiculous. Johnson signalled Prime Minister Keir Starmer’s commitment, largely following France’s lead, aimed at capturing voters’ attention, not promoting a ceasefire.

“It’s nothing to do with promoting peace in the Middle East. It has nothing to do with advancing a two-state solution,” the former leader of the UK’s Conservative Party said

The pound recovered from its fall throughout July. This was due to the weakness of the U.S. employment data, which was published on Friday. Sterling rose to a high of 1.3310 and closed at 1.3279.

The July non-farm payroll data caused such a shock that President Trump immediately fired the head of one of America's most important economic institutions, hours after weaker-than-expected jobs data stoked further alarm about his tariff policy.

On Social Media, Trump claimed that Erika McEntarfer, Commissioner of the Bureau of Labour Statistics, had rigged the jobs figures to make Republicans and the President himself look foolish.

The simple fact is that when the data is published on the first day of the month, there are always anomalies in the numbers due to there being so many estimates included.

While it is by no means certain that there will be significant revisions higher when the August data is published, there is a fair chance it will happen, despite the lower revisions to previous releases.

According to the data, just 73k new jobs were created in July, but the unemployment rate rose only marginally to 4.2% from 4.1% earlier. The next payroll data will be published on September 5th, well before the FOMC’s next meeting, when a rate cut is considered a distinct possibility.

In the aftermath of the blackout that preceded the FOMC meeting, several Fed officials have shared their views.

Raphael Bostic, the President of the Atlanta Fed, told reporters that in his view, Friday’s employment numbers raise concerns about risks to the job market, suggesting the economy may be weakening more broadly. He told CNBC that the latest jobs figures were "significant" and noted that data revisions highlight the possibility of a slowdown.

Despite these concerns, Bostic maintained that "in many regards, the labour market still looks good" and said he wouldn’t have changed this week’s Fed decision based on the new data.

Bostic indicated that the jobs data show risks "may be coming more into balance," but emphasised that inflation remains further from the Fed’s target than employment. He added that he’s not ready to increase his projection for interest rate cuts in 2025.

The Atlanta Fed president also noted it might take up to 12 months for businesses to adjust their pricing strategies, acknowledging, "I think we’re in a very difficult environment right now."

Meanwhile, in an interview with Bloomberg TV on Friday, Federal Reserve Bank of Cleveland President Beth Hammack noted that the July jobs data was disappointing. However, she believes that underneath all the “chatter” surrounding the data. The market is fairly resilient.

Earlier in the day, the US Bureau of Labour Statistics reported that Nonfarm Payrolls rose by 73,000 in July, missing the market expectation of 110,000. Additionally, note that the May NFP increase was revised down by 125,000, and the change for June was revised down by 133,000.

The economy has lost more than 250k jobs due to these revisions, which may well alert the FOMC to act in September.

A slowdown in job growth had been expected for some time, so Jerome Powell may not be overtly perturbed, but he is sure to face further pressure from President Trump.

The dollar index saw a spectacular correction to its recent strength. It fell to a low of 98.61 and closed at 98.68.

Officials at the ECB and the European Union have described the Eurozone economy as “resilient”. Those comments are based upon a single piece of evidence, the employment data.

This has long been considered one of the most unreliable data sets, delivered monthly by Eurostat. The reason for this is that the deadline for its delivery is on a tight schedule, and several of the twenty Eurozone members provide estimates of their data to satisfy their deadlines. These estimates can be wildly inaccurate and are rarely subject to revision.

While this is well known, the region accepts the inaccuracy since it favours their “rose-tinted” view of the economy.

Unemployment in the Eurozone is at record lows, even if it has begun to tick up recently. This also suits the more hawkish members of the Governing Council since it shows that there is no need for further rate cuts, as the economy is showing signs of resilience.

When you drill down into the individual economies, only Spain is performing close to potential. Greek inflation is significantly higher than the Eurozone average, at 3.7%. Yet, despite this, its Central Bank Governor chooses to say that the eurozone average is close to where the ECB wants it to be.

Inflation in Greece has risen for a third consecutive month, with its rate dangerously approaching the 4% level, according to Eurostat’s flash estimates for the consumer price index in July. This development came at a time when inflation in the eurozone remained at the same levels in July as in June, so it is unlikely to cause a stir.

The Cypriot Central Bank Governor commented recently that the Eurozone economy appears resilient, despite difficulties internationally. Nevertheless, the environment remains uncertain, mainly due to trade tensions.”

The trade deal that has been agreed between Brussels and Washington may ease some of the uncertainty that currently exists, but the region's larger economies, Germany, France, and Italy, believe that the trade deal, while being the best that could be achieved, could be a disaster for their exporters, particularly in the automotive and allied industries.

Europe's economy barely grew in the April-June quarter as frantic earlier efforts to ship goods ahead of new U.S. tariffs went into reverse and output fell for the continent's biggest economy, Germany.

Gross domestic product grew an anaemic 0.1% compared with the previous quarter in the 20 countries that use the euro currency, the EU statistics agency Eurostat reported Wednesday. Growth was 1.4% over the same quarter a year ago.

And prospects are mediocre for the coming months, given the 15% tariff, or import tax, imposed on European goods in the U.S. under the EU-U.S. trade deal announced Sunday. The higher tariff will burden European exports with higher costs to either be passed on to U.S. consumers or swallowed in the form of lower profits.

The Euro saw significant buying interest on Friday as the dollar reacted badly to the U.S.> jobs report. It rallied to a high of 1.1599 and closed at 1.1588. The Euro will only retain its current strength if there are further comments from Fed officials that a rate cut has been brought closer by the data. If Jerome Powell is as data-driven as he says, a cut should be on the cards.

Have a great day!