Bank of England governor: softening jobs market means rate cuts likely
The governor of the Bank of England has predicted that UK interest rates will continue to fall, gradually.
Andrew Bailey has told CNBC in an interview this morning that the UK’s labour market “is softening”, pointing to signs that pay increases are starting to come down.
I think the path of interest rates will be gradually downwards, I’ve not changed my mind on that.
The key question, Bailey added, is whether that softening helps to bring inflation down to the Bank’s 2% target (thus giving it the confidence to lower borrowing costs).
Bailey adds that the recent drop in energy prices, following the Israel-Iran ceasefire last month, is a helpful backdrop to the Bank’s next interest rate decision in early August.
The City money markets currently indicate that there’s a 75% chance the Bank cuts interest rates, from 4.25% to 4%, next month.
Key events
Eurozone inflation rises: What the experts say
The small pick-up in eurozone inflation last month makes it likely the ECB will leave interest rates on hold at its meeting later this month.
Richard Flax, chief investment officer at Moneyfarm, says policymakers will be worried that energy prices could pick up again.
Eurozone inflation rose slightly from 1.9% in May to 2.0% YoY in June, aligning with the ECB’s target. The increase was driven by higher energy costs and persistent service sector inflation, which continues to be the main source of upward pressure. Core inflation is expected to remain unchanged, suggesting that underlying price dynamics are stable for now.
Energy markets remain a key risk. Prices surged in June due to geopolitical tensions, though a recent ceasefire in the Middle East has helped ease some of the pressure. Still, the potential for renewed volatility could complicate the inflation outlook in the months ahead.
With inflation near target and no major surprises in core data, the ECB is expected to hold rates steady at its July meeting. Markets are looking to September for the next potential move, depending on how inflation evolves.
Diego Iscaro, head of European economics at S&P Global Market Intelligence, also sees a September cut as more likely:
“Inflation edged upwards in June, just as markets expected. The modest increase in inflation is not particularly worrying, given it was mainly driven by a lower fall in energy prices, but the somewhat stronger rise in service price inflation will not be welcome news.
“We do not think June’s inflation print will give ammunition to either doves or hawks on the ECB’s governing council. With trade policy-related uncertainty still clouding the picture, there is a risk that the economic outlook may look quite different when the ECB meets later this month.
We still expect interest rates to remain unchanged this month, but we see the door opening for a last 25bp cut in September as subdued activity and a stronger euro push underlying inflationary pressures down.”
Eurozone inflation rises to ECB target
Newsflash: Inflation across the eurozone has risen back to target.
Consumer price across the euro area rose by 2.0% in the year to June, statistics body Eurostat reports, up from 1.9% in May.
That means inflation is back to the European Central Bank’s 2% target.
The increase was partly due to changes in energy prices. Energy inflation rose to -2.7% in June, up from -3.6% in May, following the increase in oil prices last month driven by the crisis in the Middle East.
Service sector inflation rose to 3.3%, up from 3.2%, while food, alcohol & tobacco inflatoin dipped to 3.1%, fromh 3.2% in May. Goods inflation slowed to 0.5%, from 0.6% in May.
During his interview with CNBC, Andrew Bailey also warned that UK companies are delaying investments due to economic uncertainty.
He says:
“That increase in uncertainty and predictability is definitely coming through in terms of activity and growth.
“When I go around the country talking to businesses, which I do a lot, what they tell me is that they are putting off investment decisions.”
UK factory downturn easing
The downturn in UK manufacturing has eased last month, new data shows, as output, new orders and employment fell at slower rates than in May.
The latest survey of purchasing managers at British factories has also found that business optimism improved to a four-month high in June.
This lifted the UK manufacturing PMI to 47.7 in June, its highest reading in five months, but still below the 50-point level separating expansion from contraction.
The report found that manufacturers cut output due to weak market conditions, lower demand from clients, trade war uncertainty and geopolitical tensions.
Tariffs continued to hit demand, and client confidence, with new export business falling for the forty-first month in a row amid reports of reduced demand from the US, Europe and China, S&P Global says.
Manufacturers also cut jobs, for the eighth month running, with the steepest reductions at large-scale producers, despite the UK securing its trade deal with the US last month.
Rob Dobson, director at S&P Global Market Intelligence, says:
“Although the downturn in UK manufacturing continued in June, the latest PMI survey provides signs of conditions stabilising. Production, new orders and employment all fell at slower rates, while business optimism picked up to a four-month high. The orders-to-inventory ratio, a reliable bellwether of future production trends, also climbed sharply to its highest since August 2024.
Inflation of both input costs and selling prices meanwhile nudged lower to hint at a softening inflation trend.
“That said, any hoped for stabilisation remains fragile and subject to potential headwinds that could severely impact demand, supply chain reliability and future growth prospects, as manufacturers continue to caution their optimism with concerns about heightened geopolitical tensions, weak global markets, tariff uncertainties and fears over the direction of future government policy.”
Argos fires up Sainsbury’s growth as shoppers seek fans and paddling pools
Sainsbury’s has recorded its strongest growth since last summer after its Argos chain recorded a big step up in sales as shoppers sought out paddling pools and fans during recent hot weather.
The retail group said Argos, its catalogue shop, was able to achieve growth of 4.4% in the three months to 21 June, up from 1.9% in the previous quarter. Comparable group sales, excluding fuel, rose 4.7% on a year earlier.
The group’s total sales rose 4.9%, helped by the strong trading at Argos and a rise in clothing sales as shoppers snapped up shorts and swimsuits, as well as healthy demand for its premium food ranges. That excludes fuel, where sales fell partly because of price decreases.
The retailer said it had achieved the strong sales despite a “subdued, highly competitive and deflationary general merchandise market” as it booked rapid growth in online sales and via its app. Sales in stores declined, partly because of further closures as many Argos sites move from high streets into Sainsbury’s supermarkets.
Eurozone manufacturing sector stabilising
Over in the eurozone, the manufacturing sector has shrunk again but at a slower rate.
Data provider S&P Global has reported that its eurozone manufacturing PMI has risen to 49.5, up from 49.4 in May. That’s a 34-month high, but still below the 50-point mark that shows stagnation.
Dr. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, reports that there are signs of stabilization in Europe’s manufacturing sector.
Companies have now expanded production slightly for the fourth month in a row, order intake has ceased to fall, and slightly longer delivery times also indicate that demand is picking up a bit.
Against the backdrop of numerous uncertainties – US tariffs, the crisis in the Middle East, and Russia’s ongoing war against Ukraine – this can certainly be seen as a sign of resilience.
However, it also has to do with the fact that, after years of recession, the economic cycle usually turns at some point because old machines need to be replaced, cars can no longer be repaired, and the necessary modernization of factory buildings can’t be postponed any further.
Bailey: Post Cold War defence dividend is over, and turning around
Bank of England governor Andrew Bailey then warns that the UK, like all countries, is facing “headwinds”.
Asked about the UK’s fiscal position, he says chancellor Rachel Reeves has “set out a very clear fiscal framework”, which he argues needs to include some “flexibility”.
[Reminder: Reeves only has limited headroom to keep within her fiscal rules, and the government’s u-turn on welfare reform will eat into it].
Bailey tells CNBC that headwinds include an “ageing population”, which has implications for fiscal policy.
Bailey aso warns that the post-Cold-War defence dividend is “obviously over and is turning around” [ie, countries are committing to spend more on defence].
He adds:
“The UK has a fiscal framework. The chancellor and I discuss it often. I know the chancellor is very committed to having a robust fiscal policy in place, and that is important as a backgrop to macroeconomic stability.”
The governor also cites AI as the most likely source of the next upturn in productivity.
Bank of England governor: softening jobs market means rate cuts likely
The governor of the Bank of England has predicted that UK interest rates will continue to fall, gradually.
Andrew Bailey has told CNBC in an interview this morning that the UK’s labour market “is softening”, pointing to signs that pay increases are starting to come down.
I think the path of interest rates will be gradually downwards, I’ve not changed my mind on that.
The key question, Bailey added, is whether that softening helps to bring inflation down to the Bank’s 2% target (thus giving it the confidence to lower borrowing costs).
Bailey adds that the recent drop in energy prices, following the Israel-Iran ceasefire last month, is a helpful backdrop to the Bank’s next interest rate decision in early August.
The City money markets currently indicate that there’s a 75% chance the Bank cuts interest rates, from 4.25% to 4%, next month.
UK house price fall: what the experts say
Nationwide’s house price report suggests the UK housing market remains in “a bumpy patch”, reports Matt Swannell, chief economic advisor to the EY ITEM Club.
“House prices fell by 0.8% in June, more than undoing the 0.4% pick up recorded in May. Of course, in any individual month house prices can be quite volatile and this has been exaggerated by April’s change in stamp duty thresholds. Nonetheless, house prices are still higher than they were 12 months ago. However, over the last few months house prices have chopped sideways, so the annual growth rate has slowed to 2.1% in June from 3.5% in May.
“The change in stamp duty thresholds distorted the market over the first half of the year. In the run up to the April deadline, the market strengthened as transactions were rushed through. But that momentum proved temporary, and transactions fell substantially into April. Since then, the housing market has been in a soft patch, but we think this will prove temporary, with the rise in May’s mortgage approvals for new home purchases, which lead housing transactions, already indicating it’s starting to fade.
“The housing market should see a modest pickup in the second half of the year as further interest rate cuts and a relatively low unemployment rate support demand. However, with house prices remaining high, affordability challenges and ongoing economic uncertainty will likely hold back some buyers.”
Mark Harris, chief executive of mortgage broker SPF Private Clients, isn’t alarmed by the 0.8% drop in UK house prices last month, saying:
“Moderating house price growth is good news for the wider health of the housing market, making home ownership more realistic for first-time buyers, many of whom are already relying on the Bank of Mum and Dad.
Lenders have been reducing mortgage rates and enhancing loan-to-incomes, increasing the size of loan that some borrowers can access. However, while the borrowing environment may be easing, higher inflation and the wider economic picture remains a concern, which could mean the pace and size of further base rate reductions is more gradual than markets thought only a short while ago.”
North London estate agent Jeremy Leaf warns sellers they need to price their properties “realistically”:
“In our offices, the amount of stock presently overhanging the market has not only resulted in lower prices as seen in these figures, but has meant more protracted transactions.
“Looking forward, only realistically-priced properties which stand out from the crowd will continue to attract attention as worries about the economy and inevitable tax rises on the horizon play their part.”
Ofgem approves £24bn energy upgrade plan
In the energy sector, a £24bn investment programme to improve Great Britain’s power networks has been signed off, with customers warned bills will rise to help pay for it.
Regulator Ofgem has given a “provisional green light” for network operators to invest £15bn in the country’s gas transmission and distribution networks, to ensure they keep operating safely.
A further £8.9bn is lined up to fund the biggest expansion of the electricity grid since the 1960s, with 80 major projects planned including new power lines, substations and other technologies.
Ofgem CEO Jonathan Brearley says:
“Britain’s reliance on imported gas has left us at the mercy of volatile international gas prices which during the energy crisis would have caused bills to rise as high as £4000 for an average household without government support. Even today the price cap can move up or down by hundreds of pounds with little we can do about it.
“This record investment will deliver a homegrown energy system that is better for Britain and better for customers. It will ensure the system has greater resilience against shocks from volatile gas prices we don’t control.
Consumers pay for the investment through network charges, which currently make up almost a quarter of an average household energy bill.
Ofgem has calculated that this investment is estimated to increase network charges on bills by £104 by 2031. However, it says the projects will lead to £80 of savings for consumers by 2031, meaning they should actually add £24 to average bills by 2031.
The announcement comes as Ofgem’s latest quarterly price cap kicks in, meaning the cost of energy for millions of customers should fall 7% from today until the end of September.
North-south divide in house prices ‘has narrowed’
Nationwide’s UK house price data also shows that prices rose fastest in Northern Ireland in the last quarter, with annual price growth of 9.7%.
Annual prices rose by 4.5% in Scotland, and by 2.6% in Wales, and were up 2.5% in England over the quarter.
Nationwide’s chief economist Robert Gardner reports that the north-south divide in house price performance narrowed during the quarter, explaining:
Average prices in Northern England (comprising North, North West, Yorkshire & The Humber, East Midlands and West Midlands) were up 3.1% year on year, whilst those in Southern England (South West, Outer South East, Outer Metropolitan, London and East Anglia) were up 2.2%.
The North was the top performing region in England, with prices up 5.5%. Meanwhile, East Anglia was the weakest performer with annual growth of 1.1%.
UK house prices fell in June, Nationwide reports
Newsflash: The average UK house price fell last month, adding to signs of a slowdown in the property market.
Lender Nationwide reports that house prices fell by 0.8% in June, following a 0.4% rise in May.
That pulled the average annual rate of house price inflation down to 2.1%, from 3.5%, and means the average property now costs £271,619.
Robert Gardner, Nationwide’s chief economist, said:
The softening in price growth may reflect weaker demand following the increase in stamp duty at the start of April. Nevertheless, we still expect activity to pick up as the summer progresses, despite ongoing economic uncertainties in the global economy, since underlying conditions for potential homebuyers in the UK remain supportive.
“The unemployment rate remains low, earnings are rising at a healthy pace in real terms (i.e. after accounting for inflation), household balance sheets are strong and borrowing costs are likely to moderate a little if Bank Rate is lowered further in the coming quarters as we and most other analysts expect.
US dollar has worst first half in more than 50 years amid Trump tariffs
2025 has been a rough year for the dollar though.
It has sled 10.8% in the first six months of the year, its worst first-half performance since 1973 against a basket of rival currencies.
Stephen Innes, managing partner at SPI Asset Management, says the dollar is experiencing a ‘structural unwind’ as Donald Trump alarmed investors with his trade wars, and attacks on the Federal Reserve.
Trump’s tariff timebombs, fiscal bazookas, and the creeping perception of Fed capture have all coalesced into one ugly truth: the dollar is no longer the safe-haven default, at least not for now.
This wasn’t supposed to happen. The consensus playbook had the dollar strengthening as Trump’s protectionist blitz torched everyone else’s economies. But instead of Europe or Asia cracking first, it’s the U.S. that’s lost the narrative. Growth risks have migrated stateside, and rate-cut expectations have exploded, dragging yields lower and scaring off global capital.
Introduction: London markets celebrate strong H1
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
It’s a new month, and also the second half of the year. And the London stock market can look back on its strongest first six months of any year since 2021.
The FTSE 100 share index has gained 7.2% so far this year, its best January-June performance in four years, and its third-best first half to a year in the last decade.
Stocks in London have recovered from their trade war shock in early April, helped by Donald Trump’s 90-day pause to new tariffs which ends next week. Britain’s trade deal with the US, which kicked in yesterday, has also helped the mood.
Danni Hewson, AJ Bell head of financial analysis, says:
“Considering the massive market wobble which followed Donald Trump’s ‘Liberation Day’ speech the fact that the FTSE 100 has turned in its best half-time performance since 2021 is something worth shouting about.
“Big share price falls grabbed headlines at the start of April as many UK investors watched the value of their pensions fall, but despite the geopolitical uncertainty and tariff turmoil London markets have thrived in the second quarter.
The FTSE 100 was lifted by strong gains among defence companies; BAE Systems has gained over 60%, while Babcock has more than doubled, as rising geopolitical threats lift their order books.
The smaller FTSE 250 index had a strong second quarter to the year, gaining over 11% in April-June, Reuters reports.
Other global markets also recovered from their trade war slump, with the US S&P 500 index ending June at a record high.
The agenda
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7am BST: Nationwide’s UK house price index for June
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8am BST: Bank of England governor Andrew Bailey to give an interview to CNBC
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9am BST: Eurozone manufacturing PMI report for June
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9.30am BST: UK manfuacturing PMI report for June
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10am BST: eurozone inflation estimate for June
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2.30pm BST: Andrew Bailey, ECB president Christine Lagarde, Fed chair Jerome Powell, Bank of Japan’s Kazuo Ueda and Bank of Korea governor Chang Yong Rhee speak at the ECB Forum on Central Banking in Sintra
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3pm BST: JOLTS report on US job creation