02/08/2025 by Tony Redondo
It’s decision time for the BoE (Bank of England) when they meet on Thursday to decide on the next move in UK interest rates.
UBS, Barclays and Lloyds amongst others are expecting a three-way split decision given conflicting data point on a weakening labour market and sticky inflation with five members expected to support a 0.25% cut, two favouring a larger 0.5% cut, and two wanting no change.
The markets have priced in two 0.25% cuts this year, which would bring interest rates to 3.75% by year end with UBS and Capital Economics forecasting the BoE base rate will come down to 3% by the end of 2026. The BoE’s forward guidance and updated economic projections are likely to be little changed, keeping the bias towards only gradual further rate reductions.
July closed with a bang with a multitude of central bank decisions, key economic data, and the latest chapter in the tariff saga.
Currency Exchange Rates Update
Last week, the Pound fell to its lowest level against the Euro since November 2023 on disappointing UK economic data, before rising by 1.7% in 3 days following the US-EU trade deal that saw 15% tariffs imposed on EU exports to the US, giving a 5% advantage to UK exporters before dropping 1.26% following an unexpectedly weak US jobs report as the Euro has traded as an alternative to the Dollar all year. The jobs surprise comes just two days after Fed Chair Jerome Powell warned there was no need to cut interest rates owing to ongoing economic resilience and kept US interest rates unchanged for the fifth meeting in a row. The markets duly reacted badly to Powell’s misreading of the situation that also vindicates US President Donald Trump, who has persistently accused the Fed of being too slow to recognise the need for lower interest rates.
https://www.express.co.uk/news/uk/2087027/brits-heading-holiday-euro-pound
Against the US Dollar, the Pound fell nearly 1.2% last week and over 2.8% in the last month.
This week, the key economic data releases includes:
Tuesday EU PMI Composite
US Trade Balance
Wednesday Germany Manufacturing & Industrial Orders
Thursday China Trade Balance (Exports & Imports)
UK Halifax House Price Index & BoE Interest rate decision
What’s in the news?
The IMF is predicting that the world economy will not suffer as badly from President Trump’s tariffs as previously thought, raising its global economic growth forecast from the 2.8% predicted in April to 3%.
The IMF did not upgrade its growth forecast for the UK, keeping to its forecast made in April for UK GDP to inch up 1.2% this year and 1.4% in 2026. The IMF also warned the UK faces ‘significant challenges’.
UK
The FCA (Financial Conduct Authority) reported a 251% increase from 2019 on the number of people aged 36 or older taking out mortgages lasting at least 35 years as rising housing costs have driven borrowers to lengthen mortgage terms to reduce monthly payments. Experts warn this may impact retirement savings, with some homeowners potentially relying on pensions to clear outstanding debt.
HMRC took in a record £6.7bn in inheritance tax between 2022 and 2023, as a longstanding freeze on the tax-free threshold and ballooning asset prices meant more estates were sucked in to paying the unpopular tax. The overall earnings from inheritance tax rose by over £700m in the tax year 2022/3, a year-on-year jump of 12%. These figures come on the back of a similarly large jump in the 2021/22 year.
Good news
Job matching platform Adzuna in their latest UK Job Market Report showed UK job vacancies saw their fastest annual growth in nearly three years in June. This data marks the strongest annual growth since July 2022 and the fourth consecutive month of year-on-year gains.
The Labour government has laid out plans for dedicated “hospitality zones” which will allow outside dining, street parties and extending opening hours to be approved more quickly. Ministers are also exploring ways to make it easier to convert unused shops into new venues.
Not so good news
Billionaire legendary investor Ray Dalio, founder of Bridgewater Associates, has warned that the UK is in a “debt doom loop” due to rising taxes and debts. He asserted that the Government’s tax hikes could drive wealthy taxpayers away, worsening the economy. The UK’s national debt is currently £2.9trn and rising. Dalio noted that the top 10% pay 75% of income taxes, and losing even a small percentage of them could significantly reduce tax revenue. He called for strong leadership to address both financial and social challenges, echoing concerns from the IMF (International Monetary Fund) and the OBR (Office for Budget Responsibility).
Nigel Green, chief executive of deVere Group, says Britain is sleepwalking into a long-term economic decline by driving away wealth creators and refusing to compete for their return. Henley & Partners projects that 16,500 millionaires will leave the UK in 2025, following the loss of 10,800 last year. At least 18 billionaires have also reportedly departed since 2022. Britain is now the only G7 economy expected to post negative millionaire growth this year. Wealth migration doesn’t just affect a narrow elite but affects investment flows, job creation, philanthropy, asset markets, and the tax base itself. Some analysts warn that losing just 5% of top earners could erode over 30% of income tax receipts.
The latest “Red Flag Alert” report from Begbies Traynor, which has provided a snapshot of British corporate health for almost two decades, shows nearly 50,000 businesses are now in ‘critical’ financial distress amid the current climate of volatile consumer spending, global economic turbulence and rising taxes on business. The rise in ‘critical’ financial distress was felt in every corner of the UK economy with all 22 sectors covered by Red Flag Alert experiencing an increase over the last 12 months. After some signs of improvement in the first quarter of the year, this latest research also shows a noticeable decline in the health of the UK economy in the second quarter with some of the economy’s key bellwether sectors worryingly saw critical distress rise at pace versus the second quarter of 2024, including support services and the construction sectors.
The BRC (British Retail Consortium) report a 4% year on year increase in food inflation in July.
Novuna Business Finance report that UK small business confidence has reached its lowest level in five years.
The IoD (Institute of Directors) report that business confidence has plummeted to its lowest level since 2016.
The ASI (Adam Smith Institute) report 28% of young (18- to 30-year-old) are considering leaving the UK to escape the country’s stuttering economy and unaffordable housing market. Another 30% said they had ‘briefly considered’ it, while 35% said leaving the UK had never crossed their mind.
USA
The US economy grew at an annualised rate of 3% in the second quarter of the year, beating expectations and reversing the first quarter’s contraction. The Cebr (Centre for Economics and Business Research) has revised its 2025 GDP growth forecast up from 1.4% to 1.6%.
The Federal Open Market Committee voted 9-2 to keep the federal funds rate unchanged at a range between 4.25%-4.5%. This was the first time since late 1993 that multiple governors cast no votes on a rate decision.
The US economy added just 73,000 jobs in July, and the numbers for prior months were revised sharply lower. The unemployment rate ticked higher to 4.2%, raising potential trouble signs for the US labor market. Heather Long, chief economist at Navy Federal Credit Union said, “This is a gamechanger jobs report. The labor market is deteriorating quickly.” Following the report, futures traders raised the odds of the Fed cutting US interest rates when they next meet on 17 September from 40% to 63%.
Treasury Secretary Scott Bessent has expressed confidence that the US and China are on the way to trade pact. The two sides currently are in truce over tariffs after launching aggressive duties on each other. They have until the 12th of August to come to an agreement. The US had implemented 145% duties in Chinese imports, while China had countered with a 125% rate before the US lowered its rate to 30% while China cut to 10%.
The S&P 500 notched its sixth straight all-time high closing record.
Microsoft joined the $4 trillion club after reporting an incredible acceleration of business, especially from its AI digital assistant Copilot and its Azure cloud division.
The EU
The Eurozone economy slumped in the second quarter of 2025, only growing by 0.1%, a concerning fall from the 0.6% GDP growth recorded in the first quarter. The outlook for the economy now looks mixed but inflation appears to have been tamed. Growth forecasts are not strong and global trade frictions continue to cast a shadow over economic recovery. It remains to be seen how the US-EU trade deal will affect its exports.
The Italian government has approved a ban on new ground-mounted solar panels on productive farmland, following a proposal by the agricultural ministry.
Others
The Australian CPI (consumer price index) inflation reading saw the headline annualised number fall from 2.4% in the first quarter of the year to 2.1% in the second quarter. The monthly CPI reading fell from 2.1% to 1.9%, below the RBA (Reserve Bank of Australia) 2-3% target band for the first time since March 2021. The markets now see a 98% chance of the RBA announcing an interest rate cut when they next meet on 12 August.
India has been stung by a 25% tariff on its exports to the US, with an extra unspecified “penalty” to be introduced after President Trump slammed it for its trade ties with Russia.
Quote
Roy Disney, “Decision making is easy when your values are clear.”
