03/05/2025 by Tony Redondo
The BoE (Bank of England) make their next monthly decision on UK interest rates on Thursday. The markets see an 80% chance of a 0.25% cut and a 20% of a bigger 0.5% cut but with inflation expected to spike to 3.7% in the coming months, the BoE finds itself between a ‘rock and a hard place’. Cutting rates should stimulate UK economic growth but fuel the inflationary spike whilst making the Pound less attractive to international investors. Raise rates to combat the coming inflationary spike risks burying the moribund UK economy whilst boosting the value of the Pound in the currency markets. This Thursday, the BoE will also publish its latest quarterly Monetary Policy Report followed by Governor Andrew Bailey’s press conference.
Ahead of the meeting, BoE policymaker Megan Greene said US tariffs would probably lead to lower rather than higher inflation. Greene added that she is concerned about Britain’s weak productivity growth and supply-side constraints on the economy. There is also considerable uncertainty around the implications of the recent budget on the economy and in particular high labour costs with the UK minimum wage having recently risen by 7% on top of rises to employer’s NICs.
Barclays expect UK interest rates to fall to 3.5% by September from the current 4.5% while Morgan Stanley predict rates will fall as low as 2.75% during the first half of 2026.
https://news.sky.com/story/money-interest-rates-mortgage-inflation-skynews-latest-blog-13040934
On Wednesday, it’s the Fed’s turn to announce on US interest rates with chair Jerome Powell under fierce political pressure from President Trump to lower US interest rates from 4.5%.
Currency Exchange Rates Update
The Pound ended April on a dour note, down over 1.6% on the month against the Euro but picked up 0.65% last week.
The Dollar finished April with four straight days of gains that took the Dollar to a one-week high against the Pound.
Last month proved to be the best ever April for the Euro against the Dollar since the inception of the Euro in 1999.
What’s in the news?
UK
Last Thursday saw elections in 24 council areas, six mayoral regions alongside the Runcorn and Helsby parliamentary by-election. The results have been described as a ‘Reform-quake” by Nigel Farage after Reform took control of a number of councils including Kent, Lancashire, Durham, Nottinghamshire, Derbyshire and Staffordshire, winning a total of 648 councillors. The Liberal Democrats gained 146 and the Greens 41. The Conservatives lost 635 councillors; Labour lost 198 alongside 97 independent councillors. Reform also won the Greater Lincolnshire and Hull and East Yorkshire mayorships and won the Runcorn and Helsby by-election by six votes, overturning a Labour majority at the July 2024 general election of 14,696. Runcorn was the 16th safest Labour seat. Labour leader Sir Keir Starmer insisted “we get it” but insisted there would be no change of approach despite the losses.
Starmer is set to sign a joint declaration for a “free and open trade” agreement with the EU as part of Labour’s “relations reset” with the European Union in what some see as a snub to President Trump.
The Nationwide reported the fastest month-to-month slowdown in nearly two years in house price growth in April as buyers rushed to buy homes in March in order to avoid paying the extra stamp duty tax announced in last October’s budget by Chancellor Rachel Reeves.
Reeves is being investigated by Parliament’s standards watchdog after failing to declare on time that she received free theatre tickets. The Chancellor attended an event at the National Theatre over Christmas but did not add the donation to the MPs’ register of interests within the specified timeframe.
Unite, Labour’s biggest union backer has attacked the Government’s net zero drive warning the plans risk becoming a “political millstone” around the party’s neck. It comes in the same week Sir Tony Blair voiced criticism over policies to achieve net zero by 2050.
Good news
The FTSE 100 stock market index is on its best winning streak since 2017 with fifteen consecutive sessions of gains amid a calming of investor nerves over President Trump’s ‘Liberation Day’ tariff policy announcement. The index is now more than 10% higher than its closing low record following the aftermath of the sweeping tariff announcement of 2 April.
Not so good news
UK economic growth forecasts for 2025 range from 0.5% to 1.6%. The four most pessimistic forecasts are all banks, Nomura, UBS, NatWest and Barclays. At the other end of the scale are the likes of the OECD (Organisation for Economic Co-operation and Development), NIESR (National Institute of Economic and Social Research) and the CBI (Confederation of British Industry) all leading the pack at 1.6%. Will finance or industry prove to be right?
Forecasters, the EY Item Club added to the pressure on Starmer and Reeves by downgraded GDP growth for 2025 from 1% to 0.8% and for 2026 from 1.6% to just 0.9%.
Ipsos Mori Poll reported that confidence about the economy in the UK over the next 12 months has fallen to its lowest level on record with 75% of people polled expecting the economy worsening this year. This is the lowest degree of optimism since records began in 1978.
The Lloyds Bank Business Barometer showed a 10% drop in business confidence between March and April to a three-month low of 39%. This is the biggest drop since June 2022, with both the economic optimism and trading prospects subcomponents registering a decrease. These results from the Lloyds Business Barometer results show a combination of tariffs and higher business costs in the UK are weighing on businesses. Lloyds say April saw a surge in firms planning to raise prices, rising to 68%. This marks the largest month-on-month increase since September.
A poll by the BRC (British Retail Consortium) revealing that 52% of HR directors anticipate job cuts and increased prices as a result of Labour’s proposed workers’ rights legislation. BRC chief executive Helen Dickinson said, “Unless amended, the bill will make it even harder to keep and create jobs.” The British Chambers of Commerce (BCC) has also expressed concerns, calling for amendments to prevent “unintended consequences that could limit employment opportunities and economic growth.” Retailers are facing additional costs, including £5bn from higher Minimum Wage and National Insurance contributions, with another £2bn expected from a new packaging tax in October. Hiring in the retail sector has dropped by 43.11% year-on-year, raising concerns about the impact of the Employment Rights Bill on small businesses.
The BRC also reported that food inflation in the UK surged to 2.6% year on year in April, marking its highest level in nearly a year.
USA
Mixed economic news out of the US economy ahead of Wednesday’s interest rate decision by the Fed.
The US economy added 177,000 jobs in April, beating expectations (133,000) and defying worries about the impact of Trump’s tariff policies on the world’s largest economy but the US economy contracted by 0.3% in the first quarter of the year as imports surged. The unemployment rate is 4.2%, in line with expectations.
April’s ISM manufacturing index fell to 48.7, a five-month low.
Treasury Secretary Scott Bessent says it’s up to China to de-escalate trade tensions. Bessent added that many countries have put forth good proposals on trade, and a deal with India could be announced soon.
Commerce Secretary Howard Lutnick says one trade deal is done, subject to final sign-off from the unnamed country’s leaders. The White House has also had “substantial talks” with Japan, and “the contours of a deal” with South Korea could be coming together.
Donald Trump has downgraded UK-US trade deal negotiations as a “second-order priority”. The UK has been placed in either phase two or phase three.
Ukraine has finally signed the minerals deal that Trump had expected Zelensky to sign in February. The details of the agreement are not yet known but the basis of the deal allow the US government and investors preferential access to Ukraine’s large amount of natural resources, in lieu of paying the US back for its billions in military aid since Russia invaded in 2022.
The EU
The Eurozone economy grew by 0.4% in the three months to March against an expected rate of 0.2% led by Ireland and Spain.
Germany’s economy grew in line with expectations by 0.2% in the first quarter of this year.
German inflation edged slightly lower to 2.1% on a yearly basis.
ECB (European Central Bank) policymakers are expected to reduce rates by 0.25% when they next meet on 5 June.
Spain, Portugal and parts of southern France suffered the worst blackout in living memory in Europe last week affecting about 55 million people. The cause of the initial fault in the region’s electricity grid is still being investigated, and the EU has insisted that there were no indications that it was a cyberattack. However, energy experts have blamed a heavy reliance on solar and wind farms in Spain for leaving the region’s power grid vulnerable to such a crisis. A state of emergency was declared in Spain, while in Portugal, water company EPAL said supplies could also be disrupted. Traditional energy systems have mechanisms which allow them to keep running even if there is a shock, such as a surge or loss of power. However, solar and wind do not have the same ability.
Others
Mark Carney’s Liberal Party won a fourth term to govern Canada following last Monday’s federal election but fell short of an overall majority. Pierre Poilievre’s Conservative Party won a record share of the vote in second place, but Poilievre lost his own seat. The vote for the NDP and the Greens collapsed. The French separatist party, the Bloc Quebecois lost seats but holds the balance of power.
Carney replaced Justin Trudeau as leader of the Liberal party in March with the Liberal Party 20-points behind in the polls. Carney now has the task of heading a minority government and negotiating with Trump with the US seemingly holding the bargaining chips. In his time, Trudeau blocked all attempts to build oil and gas pipelines to the sea. The only place Canada can send its biggest export, oil and gas, is straight south to the US. Three-quarters of Canada’s exports go to the US but only 15% of the USs to Canada.
Today, Saturday, 3 May it’s Australia’s turn. All 150 seats in the House of Representatives and 40 of the 76 seats in the Senate are up for grabs. The Labor government, led by Prime Minister Anthony Albanese, is seeking re-election for a second term. It is being challenged by the Liberal/National Coalition led by opposition leader Peter Dutton, which is attempting to return to government after one term in opposition. The latest YouGov poll reveals the Labor Party leading the Coalition 53.5% to 46.5%.
Today also sees national elections in Singapore with Lawrence Wong’s People’s Action Party hot favourites to win and continue to govern but will be closely watched as a gauge of public confidence in Wong’s leadership.
Chinese factories are stopping production and looking for new markets as US tariffs start to bite according to companies and analysts.
Senior Chinese officials have also outlined plans to support jobs and help exporters, while hinting at the possibility of more stimulus in light of rising trade tensions with the US.
The Chinese economy looks to be showing the first impacts of tariff worries, with China’s official manufacturing PMI for April reported at 49, below the 49.7 forecast and 50.5 in the previous month according to statistics from the National Bureau of Statistics.
The Chinese government says it’s evaluating the possibility of trade talks with the US.
The Irish Data Protection Commission (DPC) has fined Chinese owned TikTok €530 million for sending EU user data to China saying TikTok infringed the bloc’s GDPR data protection law over transfers of European user data to China.
Global Brent Oil prices have declined more than 15% in April to $59 a barrel that could spell disaster for the Russian economy.
Stranger than fiction
Has the world passed peak booze? Consumption of beer peaked in 2016, wine consumption has been falling since 1979, and per-capita drinking fell from 5 litres in 2013 to 3.9 litres in 2023.
TSMC along with the United Microelectronics Corporation are the linchpins of Taiwan’s so-called ‘Silicon Shield’. These two companies produce almost two-thirds of the world’s silicon chips, including the chips in every product built by Apple. TSMC also has the world’s biggest logic chip manufacturing capacity and produces, by one analysis, a massive 92% of the world’s highest-grade chips, the ones inside nuclear weapons, planes, submarines, and hypersonic missiles on which the international balance of hard power is predicated. TSMC’s latest advance? A 1.4-nanometer chip, set for high-volume production in 2028, which could be up to 30% faster and 60% more efficient than current (3nm) chips, as well as 15% faster and 30% more efficient than the 2nm processors set to go into production later in 2025. A nanometer is one billionth or 0.000000001 of a metre.
Quote
Ray Dalio, billionaire hedge fund manager, “If inflation-adjusted interest rates decline in a given country, its currency is likely to decline.”
