21 October 2024: Reeves is planning to keep the tax bands unchanged

The level of speculation about the measures the Chancellor will introduce in her maiden budget in a couple of weeks has reached a fever pitch.

Rachel Reeves has warned that she must repair the black hole in the country’s finances to ensure that she creates a solid platform on which to build an economy based on growth and job creation.

The black hole started life at around eleven billion pounds and grew very quickly to twenty-one billion pounds. It is now said to be forty billion as Reeves hunts for every penny of savings she can.

During the election campaign, both Reeves and Sir Keir Starmer made promises about taxation and public service levels, and it is only now that the public is faced with just how close Reeves is prepared to come to being accused of breaking those pledges.

A requirement to study exactly what is said very closely may very well be the oldest trick in a politician’s book, but it is still used to provide a little wiggle room.

Reeves and Starmer started by saying that there would be no tax increases in their first year in office. That mantra was quickly changed to no change to “headline” measures like income tax, national insurance and VAT. Just last week, the pledge on national insurance was amended only to include employee contributions, leaving employers concerned about an increase in what they will pay.

Inheritance tax, capital gains tax, non-dom status and the cap on child benefits for families having more than two children are all seen as being considered “fair game”.

Having seen its popularity fall significantly since July, the Government is playing the “long game” in the hope that all will become good “in the end”.

The introduction of an amended bill of worker’s rights is a measure that is akin to “old Labour” policies. Changes to access to sick pay and other rights appear to favour workers at the expense of management and business owners.

New research has found that the UK economy could gain more from generative artificial intelligence (AI) than any other advanced nation.

The opportunity to boost productivity is greatest in the public sector, where a doctor could save up to five working hours a week, according to estimates by consultancy giant Accenture. This is music to the ears of Health Secretary, Wes Streeting, who appeared on TV at the weekend to introduce new measures to “bring the NHS into the twenty-first century”. Streeting plans to begin a period of consultation with users, employees and tech at the forefront of decision-making.

Following last week’s announcement of a greater-than-expected fall in inflation last month, speculation has grown that the Bank of England’s Monetary Policy Committee may sanction another rate cut when it meets next month.

Any such vote may require the casting vote of the Bank’s Governor since it is likely to be closer to the 5-4 that approved the cut in August than the 8-1 majority for leaving rates unchanged in September.

Last week, the pound fell below the 1.30 level versus the dollar for the first time in two months as a rate cut returned to the table.

It fell to a low of 1.2974 but rallied to close at 1.3052.

The Fed wants to be as proactive as it can as the economy transitions from the elevated level of inflation it has experienced over the past eighteen months to encouraging greater economic activity and job creation. However, having cut rates once already, members of the FOMC have become a little more circumspect about their future intentions.

It is a feature of the market that once a Central Bank has decided on a pivot, in this case from fighting inflation to driving up growth, it wants to see looser monetary policy immediately.

In normal circumstances when an economy is slipping inexorably into recession, that decision is easy to make. However, with inflation having plummeted in recent months from close to double figures to almost achieving the Fed’s target of 2% there is a concern that any stimulation provided by a rate cut would see inflation rebound again and begin to rise.

The issue is that this is the first time in living memory that the Fed has cut rates with the economy not only growing but predicted to grow for at least the next six months.

This error still chastens Jerome Powell in labelling the increase in inflation immediately following the pandemic and does not want to make the same mistake again.

Being accused of fuelling a rise in inflation is the last thing he needs in the current political environment. However, he has a 50/50 chance of his job being under pressure from the forthcoming election.

Should Kamala Harris triumph on November 5th, it is expected to be “business as usual” in both the Treasury and Federal Reserve. However, should Donald Trump win, he is expected to change several things, from the introduction of tariffs on imports, which are considered inflationary, to greater oversight of the FOMC, including Presidential oversight of changes to monetary policy.

The market cannot complain about the level of advance guidance it has received since the last FOMC meeting, with a plethora of Fed Governors and Presidents lining up to give their opinion on monetary policy.

Today, Kansas City Fed President, Jeffrey Schmid will be joined by Minneapolis Fed President, Neel Kashkari to give an update on their views.

Later in the week, Patrick Harker from Philadelphia, Beth Hammack from Cleveland, as well as Fed Governor Michelle Bowman will also be speaking. Bowman’s recent comments have been eagerly awaited since she is by far the most hawkish voting member of the Committee currently.

The Dollar continues to make steady progress higher as the market leans towards a pause at the next FOMC meeting.

Last week, the index climbed to a high of 103.87 and closed at 103.46.

Recent monetary policy decisions from the ECB have, in no uncertain terms, placed a cap on any upside for the single currency. Since the Central Bank’s Governing Council abandoned its fight with inflation, to shore up activity and the economy, the Euro has seen any hope of remaining above the 1.10 level versus the dollar has faded.

The ECB’s decision was a double-edged sword since a weakening currency will see inflation rise marginally since imports will rise in price, while any fall is positive for exports.

Barely a day passes now without there being another dire warning for the economy.

Last week’s rate cut, the third in the cycle, had been unexpected up until a few weeks ago, but it was welcomed without a dissenting voice from any of the hawks on the Governing Council. Even Isabel Schnabel, the “poster girl” for the Hawks, dropped her long-standing warning about the difficulty of the ‘last mile’ in taming price growth.

Inflation dipped under 2% last month and economic growth is weakening, so markets are already betting that the ECB will speed up interest rate cuts, with its next move seen on December 12th.

“With signs of softening labour demand and further progress in disinflation, a sustainable fall of inflation back to our 2% target promptly is becoming more likely, despite still elevated services inflation and strong wage growth,” she said.

The European Central Bank may need to adjust its monetary policy to manage the risk of eurozone inflation falling below its 2% target rather than exceed it, the French Central Bank Governor François Villeroy de Galhau said last week.

To stimulate a lagging economy, the ECB has cut rates three times in quick succession. The move comes on the heels of eurozone inflation falling to 1.7% in September and sluggish growth, particularly in Germany.

“The risk of undershooting our target in the long term is now as present as the risk of overshooting it,” Villeroy said in a statement. “We should continue to reduce the degree of monetary policy restriction over the next three to six months.

The ECB overstated the time it expected inflation to fall to meet its target, previously saying that it would be the third quarter of next year before inflation sustainably at or

The Italian bank UniCredit recently provoked a political backlash in Germany by acquiring a 21% stake in the German lender Commerzbank. Even chancellor Olaf Scholz weighed in, calling the Italian move “an unfriendly attack”. The significance of this row runs far beyond the worlds of Italian and German finance.

One of Mario Draghi’s key recommendations in the recent review of Eurozone competitiveness was the need for deeper financial integration. In that context, German hostility to any tie-up raises fundamental questions about Berlin’s political commitment to wider European reform.

The Euro weakened following last week’s interest rate cut. It fell to a low of 1.0811 but rallied to close at 1.0866 as uncertainty over the result of the U.S. election grew.

Have a great day!