8 July 2025: Should the Bank of England have a neutral rate target?

The latest data from the housing market shows that prices are stagnating. After a 2.5% fall in May, the Halifax House Price Index again saw no growth. Although the 0% growth was an improvement, the data, coupled with the increase in jobless numbers and concerns about tax increases later in the year, has knocked consumer confidence.

There now appears to be little chance of avoiding an increase in taxation in the Autumn, given the dearth of suitable alternatives for either raising funds or cutting costs.

Having taken over from a Conservative Party that was failing to deliver in every area, the Labour Party has wasted its first year in government. From the Prime Minister down, Ministers have betrayed their inexperience and shown that they were ill-prepared to govern the country.

From the economy to housing, law and order, and immigration, each of their commitments has fallen well short of expectations.

Following the election, where it has become obvious that the voters' attitude was one of “anyone but the Tories,” the country has shifted to the right, with Reform UK well ahead in most opinion polls. Sir Keir Starmer is in danger of wasting the massive advantage of his Parliamentary majority by trying to become a populist in the style of Tony Blair.

He has desperately tried to “cosy up” to President Trump in a way that is reminiscent of the Blair/Bush relationship, which led to the WMD fiasco.

The UK has rushed into a trade deal with the U.S., while the agreement on the increase in the NATO budget to 5% of GDP has the potential to ruin the economy.

The Bank of England’s Monetary Policy Committee has been dominated for a significant time by the Bank’s Governor and a group of Deputy Governors who have constantly outvoted the independent members, making its decisions something of an irrelevance from the perspective of its independence.

Latterly, there have been a couple of outliers, but the votes of Dave Ramsden and Huw Pill have been swallowed up by the conservative attitude of Andrew Bailey and his acolytes.

Professor Alan Taylor has joined as the most recent independent member of the committee and has set himself on a collision course with Bailey. Since it has set itself on a path of cautious rate cuts, the MPC has, through Bailey as its “official” mouthpiece, avoided mention of what it considers to be the neutral rate of interest, where rates are neither supportive nor restrictive.

Taylor believes that this is a vital piece of information for both industry and consumers, as it provides them with an idea of the target the Bank has set itself, while Bailey views the publication as simply making a rod for its own back.

Maybe MPC meetings will be a little more interesting and unpredictable from now on.

The pound lost ground yesterday as it reacted to the weak housing data. It fell to a low of 1.3575 but recovered some of its losses to close at 1.3606.

President Trump on Monday posted online a barrage of letters he sent to country leaders, saying he would impose an array of tariffs similar to the levels he announced in April.

The most significant were letters to the leaders of Japan and South Korea that informed them of 25% tariffs on imports from their respective countries.

The President simply created further uncertainty in the financial markets since investors and traders are “crying out” for a little clarity from an Administration that appears to thrive on keeping the developed world off balance.

In total, 14 letters were sent yesterday to countries including South Africa, Malaysia, Thailand, outlining tariffs ranging from 25% to 40%.

The White House said Trump signed an executive order delaying the implementation of those tariffs, as well as the sweeping "reciprocal" tariffs on most trade partners, to Aug. 1. He does not feel the need to provide any explanation for his actions, so the question of why the three-week delay remains unanswered.

Trump appears to have failed in his attempts to bully Jerome Powell and members of the Federal Open Market Committee into cutting interest rates against their better judgment, and his new delay will simply add to the fog of uncertainty faced by importers and America’s trading partners.

The moves highlighted the topsy-turvy nature of the president's trade policy, as they suggest a looming return to the steep levels announced in April but also theoretically allow more time for negotiation.

Thus far, however, since Trump's April pause, the US has only clinched trade deals with the UK and Vietnam, as well as a framework with China. Theoretically, he makes the pause indefinite, which would scare no one other than investors and the U.S. stock markets.

Two major “deals” appear to be in the pipeline.

The EU has signalled it is willing to accept a 10% universal tariff on many of its exports, but is seeking exemptions for certain sectors. The bloc is reportedly racing to clinch a deal this week, while Canada has scrapped its digital services tax that was set to affect large US technology companies. The White House said trade talks between the two countries had resumed, with a deal by mid-July in focus.

Senator Elizabeth Warren has aimed at the Federal Reserve again, this time criticising the “watering down” of the Fed’s proposal to allow banks to use an average of the past two years’ stress testing losses in the calculation of their buffer.

The changes are meant to reduce year-over-year fluctuations in the capital requirements that result from stress tests, the Fed has said.

“Put differently, it would provide more certainty to a firm regarding its Stress Capital Buffer requirement year-to-year,” Warren, the Senate Banking Committee’s ranking member, wrote in a public comment on the proposal. “Certainly it is the opposite of what a stress test is designed to provide.”

The Publication of the June Employment Report last Thursday passed by with barely a whimper from the market. Is this simply due to its proximity to the Independence Day celebrations, or has it gone the way of several data releases and been swallowed up by the Administration’s continual toying with the country’s trading relationships?

The fact that the data came in exactly where it was predicted may also have had something to do with it. The other data published on the same day, the PMI numbers, showed that the economy is still well above the level between expansion and contraction in all the sectors that matter.

The dollar index rallied yesterday, making its most significant gains since mid-June. It reached a high of 97.67 and closed at 97.55.

One Irishman ruled himself out of the running to replace Christine Lagarde as President of the ECB when the time eventually comes for her to leave the Central Bank for pastures new.

Ireland's Paschal Donohoe was re-elected as president of the Eurogroup on Monday, just hours after Spain’s Carlos Cuerpo and Lithuania’s Rimantas Šadžius pulled out of the race to lead the powerful group of eurozone ministers.

The Irishman, who hails from the same centre-right European People’s Party political family as European Commission chief Ursula von der Leyen, secured all twenty votes from the single currency area’s finance ministers, three diplomats said. He will now lead the group for a third two-and-a-half-year term.

Cuerpo and Šadžius, both socialists, had withdrawn their candidacies after failing to garner sufficient support from other member states.

In a statement, Donohoe pledged to be "a genuine and honest broker" who will ensure that "all voices and positions are taken into account".

Donahue was seen as a genuine contender to replace Lagarde. So, if it were an Irishman, it would be Philip Lane, the ECB’s Chief Economist and, crucially, a man who has Central Banking credentials from his time as Governor of the Bank of Ireland.

Also crucially, Lane is seen as both a pragmatist and a technocrat, both qualities that are seen as vital and more akin to Mario Draghi than Lagarde.

Eurozone retail sales fell 0.7% month-on-month in May, adding to signs of economic weakness in the second quarter of the year.

The decline in retail sales coincided with a 0.3% decrease in overall services activity in April, according to data released by Eurostat.

While retail sales had shown strength at the beginning of the year, with wage growth translating into increased consumer spending, May’s figures represent a significant setback.

The timing of holidays may have contributed to the monthly decline, but the overall trend has weakened.

Despite the current downturn, there remains potential for a retail sales recovery as purchasing power continues to improve in the eurozone.

However, saving rates have been rising due to high uncertainty, and consumer confidence remains low, which could impact sales in European retail districts over a longer period.

The services sector also started the second quarter poorly, with the 0.3% decline in April primarily driven by significant drops in ICT and real estate activities.

Although the PMI for services showed some improvement for June, it indicated stagnation rather than recovery.

Analysts said recent hard data showing weakness in the service sector supports their view that second-quarter GDP growth was likely negative.

This would represent a significant change from the strong first quarter and serve as a reality check for economic activity in the eurozone, where the overall trend continues to be sluggish.

This confirms that the ECB’s blinkered approach to monetary policy is not working, since a blind rush into curing high inflation to the detriment of economic growth has seen the economy continue to weaken.

The euro lost ground for the third session in four yesterday. It fell to a low of 1.1686 and closed at 1.1708 as the markets continue to wait for news of a trade deal with the U.S.

Have a great day!