Rachel Reeves could “easily” breach fiscal rules if growth disappoints or rate shocks materialise, IMF warns
The UK could easily breach its fiscal rules if economic growth disappoints or rate shocks materialise, the International Monetary Fund has warned.
While the new Labour government has embarked on a “bold agenda”, the IMF said, delivering it will require overcoming “significant challenges” amid shockwaves from the trade war and operating within the confines of tight fiscal headroom.
The British government could reduce pressure for “overly-frequent changes to fiscal policy” by introducing more headroom, the IMF said in the final version of an annual report on Britain’s economy.
In an uncertain global environment and with limited fiscal headroom, fiscal rules could easily be breached if growth disappoints or interest rate shocks materialize.
…The first best [option] would be to maintain more headroom under the rules, so that small changes in the outlook do not compromise assessments of rule compliance.
Chancellor Rachel Reeves said in a statement that her plans would “tackle the deep-rooted economic challenges that we inherited in the face of global headwinds.”
Our fiscal rules allow us to confront those challenges by investing in Britain’s renewal. We’re committing billions of pounds into improving transport connections, providing record funding for affordable homes, as well as backing major projects like Sizewell C to drive economic growth. There’s more to do, and that’s why we’re slashing unnecessary red tape and unblocking investment to let British businesses thrive and put more money in working people’s pockets.”
The IMF warning comes as Reeves faces intense pressure to respond to a worsening economic outlook with a new round of tax rises in her autumn budget. Official figures showed this week that the UK government borrowed more than expected in June, with net borrowing rising to £20.7bn, up by £6.6bn compared with the same point a year ago. It was the second highest June borrowing figure since monthly records began in 1993.
The Fund forecast that the UK economy would grow by 1.2% in 2025, followed by 1.4% in 2026, although it noted that “risks to growth are tilted to the downside”. It warned:
Tighter-than-anticipated financial conditions, combined with households maintaining high savings rates for precautionary reasons, may hinder the rebound in private consumption and slow the recovery. In an environment of weak growth, persistent inflationary pressures may create “stagflation” risks, complicating the monetary policy stance and putting pressure on public finances. A significant rise in commodity prices due to international conflicts could further aggravate the situation.
Key events
Nationwide board under fire at online-only AGM
Kalyeena Makortoff
The Nationwide board has come under fire at their AGM, with members calling the building society’s plans to hike CEO Debbie Crosbie’s max pay package by 43% to £7m an “obscenity”.
One member, Mr Fisher, asked:
Does the CEO see both the irony and the hypocrisy of the size of her bonus: an amount in one year that most people would struggle to spend in a lifetime?
While another, Ms Andrews said: “no one needs to earn more than £1m in salary, and certainly not £7m.” Another, Dr Standon, said Nationwide already had the option of paying Crosbie up to £4m, and that pushing that figure to £7m was “an obscenity”. “One would expect Nationwide to set an example to others,” he said.
Standon added that while Nationwide expressed principles of mutuality – prioritising people over money and profits – there seemed to be a mismatch in the way it justified the hike, saying it was essential to attract and recruit talented executives. It suggests that unfortunately, your executive team are primarily motivated by money.”
She said if executives jumped ship as a result “that would be such a disappointment. But if they do leave purely because of the money, then, is it not the case that they were not in line with Nationwide principles in the first place?”
Nationwide’s chairman Kevin Parry said:
I don’t think that money is the primary motivation….I’m very confident in saying this is not about personal greed. This is about equity with people that do similar jobs elsewhere.
Meanwhile, Tracey Graham, the chair of Nationwide’s remuneration committee said:
Our job is to ensure that we have the very best leaders here at Nationwide, and we do operate in a competitive marketplace, and that is what we need to pay them. For us to believe that we are paying them equally or fairly – not as much as the banks, certainly – but we believe that they are performing and paid appropriately. We’d be delighted if the very stretching performance targets that we have set over this period of time are met.”
Rachel Reeves could “easily” breach fiscal rules if growth disappoints or rate shocks materialise, IMF warns
The UK could easily breach its fiscal rules if economic growth disappoints or rate shocks materialise, the International Monetary Fund has warned.
While the new Labour government has embarked on a “bold agenda”, the IMF said, delivering it will require overcoming “significant challenges” amid shockwaves from the trade war and operating within the confines of tight fiscal headroom.
The British government could reduce pressure for “overly-frequent changes to fiscal policy” by introducing more headroom, the IMF said in the final version of an annual report on Britain’s economy.
In an uncertain global environment and with limited fiscal headroom, fiscal rules could easily be breached if growth disappoints or interest rate shocks materialize.
…The first best [option] would be to maintain more headroom under the rules, so that small changes in the outlook do not compromise assessments of rule compliance.
Chancellor Rachel Reeves said in a statement that her plans would “tackle the deep-rooted economic challenges that we inherited in the face of global headwinds.”
Our fiscal rules allow us to confront those challenges by investing in Britain’s renewal. We’re committing billions of pounds into improving transport connections, providing record funding for affordable homes, as well as backing major projects like Sizewell C to drive economic growth. There’s more to do, and that’s why we’re slashing unnecessary red tape and unblocking investment to let British businesses thrive and put more money in working people’s pockets.”
The IMF warning comes as Reeves faces intense pressure to respond to a worsening economic outlook with a new round of tax rises in her autumn budget. Official figures showed this week that the UK government borrowed more than expected in June, with net borrowing rising to £20.7bn, up by £6.6bn compared with the same point a year ago. It was the second highest June borrowing figure since monthly records began in 1993.
The Fund forecast that the UK economy would grow by 1.2% in 2025, followed by 1.4% in 2026, although it noted that “risks to growth are tilted to the downside”. It warned:
Tighter-than-anticipated financial conditions, combined with households maintaining high savings rates for precautionary reasons, may hinder the rebound in private consumption and slow the recovery. In an environment of weak growth, persistent inflationary pressures may create “stagflation” risks, complicating the monetary policy stance and putting pressure on public finances. A significant rise in commodity prices due to international conflicts could further aggravate the situation.
Pound falls against euro to lowest level since April
It is bad news for British holidaymakers as the pound dropped to as low as 1.1458 against the euro this morning, its weakest since April.
The fall comes after a hawkish message from the European Central bank yesterday, with traders paring back bets that it could deliver another interest rate cut this year, and expectations growing that the EU is about to secure a trade deal with the US.
Meanwhile market watchers broadly expect at least one more interest rate cut from the Bank of England this year.
Weaker retail sales in June have also not helped the pound, as well as data yesterday that showed British businesses are cutting jobs at the fastest pace since February, partly in response to higher taxes. The pound also fall against the US dollar on Friday, down by 0.4% to $1.346.
Ex Barclays boss Jes Staley not appealing ban over Jeffrey Epstein links
Kalyeena Makortoff
Former Barclays chief executive Jes Staley is not appealing last month’s Upper Tribunal ruling, leaving him banned from the City for life for misleading the watchdog over his relationship with the sex offender Jeffrey Epstein.
Staley will now have to pay the Financial Conduct Authority a £1.1m fine by 6 August.
The FCA noted on its website on Friday morning that the “expiry” date for Staley to seek permission to appeal the decision had passed. Staley would have had to submit a challenge by 10 July but failed to do so.
That paved the way for the FCA to issue a final notice over the ban and its £1.1m fine over the matter.
The case centred on a letter that Barclays sent to the FCA in 2019 that stated Staley “did not have a close relationship” with Epstein and his last contact with the financier was “well before” he joined Barclays four years earlier in 2015.
However, a subsequent investigation by the FCA – triggered by a cache of 1,200 emails from Staley’s former employer JP Morgan – concluded that the pair were “indeed close” and had a relationship that “went beyond one that was professional in nature”.
Staley resigned from Barclays in 2021 over preliminary findings from the FCA’s investigation. He eventually appealed their decision to ban him from the City, leading to a two-week hearing in London in March.
The Upper Tribunal ruled against Staley in June, saying: “We agree with the [Financial Conduct] Authority (FCA) that Mr Staley’s breaches of the authority’s rules represented a serious failure of judgment by Mr Staley.”
Staley’s lawyer has been contacted for comment.
Retail sales were positive in June, but British shoppers are still in a cautious mood ahead of possible tax rises later this year, according to the latest consumer confidence index from market research firm GfK.
The index dipped to -19 in July from a six-month high of -18 in June. Economists polled by Reuters had mostly expected a reading of -20.
Neil Bellamy, consumer insights director at GfK, said people “may be sensing stormy conditions ahead”.
With speculation growing over possible tax rises in the Autumn budget, and price pressure contributing not just to higher inflation already but also to the likelihood of worse inflation to come, the news is worrying.
Finance minister Rachel Reeves is expected to raise taxes for a second year in a row in her next annual budget plan after Prime Minister Keir Starmer was forced into u-turns on plans to save billions of pounds on welfare spending.
GfK’s savings index … jumped seven points to +34, its highest level since November 2007, shortly before the global financial crisis deepened.
European stocks slip as investors await trade deal
European stocks are down by 0.6% this morning, led by the German sportswear brand Puma. Shares in the company dropped by as much as 18.7% after it said it expects US trade tariffs to cost it €80m in gross profit this year, and that it now expects to make a loss in adjusted earnings before interest and taxes.
Much of the sportswear industry faces higher costs due to US trade tariffs, as they rely on manufacturing in China, Vietnam, Cambodia, and Bangladesh.
Puma’s chief executive Arthur Hoeld, who started in the role this month and was formerly sales chief at Adidas, said the company needed to “course-correct”.
This year, 2025, will be a reset for Puma and 2026 will be a transition year for us … We as a company need to take a hard look at ourselves.
Chief financial officer Markus Neubrand said Puma would increase prices in the US in its fourth quarter, partly to mitigate the tariff impact, but declined to say how much prices would rise.
All eyes will be on the European Union next week as it tries to secure a trade deal with the US ahead of Trump’s 1 August deadline. Negotiators are nearing a deal that would place 15% tariffs on most imports from the bloc, which would mirror a deal struck this week between the US and Japan.
Kathleen Brooks, of the broker XTB, has noted however that more hawkish noise from the European Central Bank may also be weighing on appetite for European stocks.
A more hawkish than expected ECB has soured the mood for European equities, after Christine Lagarde quashed hopes that the ECB will cut rates again in September. The interest rate futures market is pricing in a 15% chance of a rate cut in September, down from a 42% chance before Thursday’s ECB meeting.
There was also some earnings disappointment, with LVMH reporting weaker sales, as consumers continued to shun LVMH’s luxury pricy brands, however, its share price is rising on Friday, as hopes rise for a turnaround in the future.
This is why European yields are rising again on Friday and yields in France and Germany are higher by 14 and 15bps this week, suggesting that the market is sensitive to the potential floor in European rates at 2%.
Bitcoin drops as hopes of Fed rate cut fade
Bitcoin fell alongside other high-risk assets on Friday, as hopes for a rate cut from the Fed next week begin to fade.
The cryptocurrency dropped to a low of $115,122, its lowest level since 11 July. It comes after Bitcoin hit an all-time high of $123,205 last week, driven by optimism around a more welcoming regulatory environment in the US, which has helped boost demand for crypto products. Bitcoin has rallied by 24% against the US dollar in the year to date.
Trump tussles with Powell on visit to the Federal Reserve
In case you missed it overnight, Donald Trump and Jerome Powell, the Federal Reserve chair, clashed last night during a state visit to inspect the renovation of the central bank’s historic headquarters in Washington.
The president claimed the total cost of the renovations was $3.1bn, higher than previously reported. As Trump made this claim, Powell shook his head and said: “I’m not aware of that. I haven’t heard that from anybody at the Fed.”
Having branded Powell a “numbskull” for the Fed’s recent decisions not to cut rates, Trump has pressured Powell with criticism of the $2.5bn bill for renovating the Fed’s historical buildings.
However, Trump backed away from earlier suggestions that he would fire the Federal Reserve chair:
To do that is a big move, and I just don’t think it’s necessary, and I believe he’s going to do the right thing.
The president’s visit to the Fed comes less than a week before the central bank’s 19 policymakers gather for a rate-setting meeting. They are widely expected to leave the benchmark interest rate in the 4.25% to 4.5% range.
Markets have opened weaker in Europe this morning. Britain’s blue chip FTSE 100 index has slipped 0.2%, while Germany’s Dax has slipped 0.8%. The French CAC 40 index has dropped 0.5%, and the pan-continental Euro Stoxx 600 has slipped 0.4%.
In the UK, NatWest is leading the FTSE 100, with its shares trading up 1.2%. The property search platform Rightmove is at the bottom of the pack, with its shares down 2.9% after it warned of slower growth in the second half of the year.
Over in the FTSE 250 index, shares in Mitchells & Butlers have risen by more than 4% at the open, after the pub chain reported that recent sunny weather has helped it grow its sales by 4.5% in the 42 weeks ended on 19 July. Phil Urban, chief executive of the company, said this morning that its strong performance meant that it could meet “cost challenges facing the sector”.
Meanwhile, shares in Marshalls have dropped by 24.4% after the building materials company issued an unscheduled trading update this morning. It cut its full-year expectations due to macroeconomic uncertainty and said it expects no improvement for the rest of the year.
NatWest reports strong profit, announces £750m buyback
Strong figures from NatWest this morning as it reports its first quarter as a fully privatised bank.
The lender has announced a £750m share buyback and raised its guidance for the year. Pre-tax profits of £1.8bn in its second quarter beat expectations, and the bank has told investors that it now expects income for the year to land above £16bn, compared with previous guidance of between £15.2bn and £15.bn.
NatWest announced its return to full private ownership at the end of May, ending more than a decade as the government sold the last of its shares in the bank after its bailout in 2008. Shares in NatWest have risen by roughly a quarter in the year to date, as banks have also broadly benefited from interest rates falling at a slower rate than expected.
Zoe Gillespie, of the wealth manager RBC Brewin Dolphin, has said the strong figures suggest NatWest’s big turnaround project has taken hold.
Its strategy of simplification, cost reduction, and technology integration – combined with sensible bolt-on acquisitions – is driving income growth and greater profitability. The addition of Sainsbury’s Bank, in particular, provides a real platform for further growth in UK retail banking.
Now fully in private ownership, NatWest has a freer hand to make its next big strategic move and, in the interim, shareholders are being well rewarded for their patience with a sizeable dividend increase and share buyback programme.
There is however a rather gloomy note in NatWest’s results, tucked under the bank’s notes on potential economic scenarios.
Since 31 December 2024, the near-term economic growth outlook has weakened. This was mainly due to the weaker economic performance in the second half of 2024 and the drag from international trade policy related uncertainty. Inflation has risen, with underlying price pressure remaining firm, particularly on services inflation.
As a result, inflation is assumed to remain a little higher than 3% through most of 2025, taking longer to fall back to the target level of 2%. The labour market has continued to cool. The unemployment rate peak is now assumed to be modestly higher than at 31 December 2024, but it is still expected to remain low. The Bank of England is expected to continue cutting interest rates in a ‘gradual and careful’ manner with an assumed terminal rate in the base case of 3.5%. The housing market continues to show signs of resilience, with prices still expected to grow modestly.
British retail sales rise in June, official figures show
There is some positive news for the retail sector this morning, with official figures showing that monthly sales rose in June by 0.9%. It follows a fall of 2.8% in May.
That was helped by warm weather, with supermarkets reporting better trading and an increase in drink purchases, the Office for National Statistics has said.
The warm weather in June helped to brighten sales, with supermarket retailers reporting stronger trading and an increase in drink purchases.
It was also a good month for fuel sales as consumers ventured out and about in the sunshine. pic.twitter.com/RHKdhbhxTo
— Office for National Statistics (ONS) (@ONS) July 25, 2025
While growth is encouraging, the numbers are weaker than expected. A poll by Reuters showed that economists had been expecting a monthly rise of 1.2%.
Jacqui Baker, head of retail at RSM UK and chair of ICAEW’s Retail Group, warns that the sunny mood music may not last long.
While the June figures are welcome news and consumer confidence ticked up last month, nervousness among consumers persists, and the unexpected rise in inflation won’t have helped. The higher price of essentials such as food and fuel will only add to the reluctance among consumers to spend as their discretionary income shrinks.
Concerns remain in the sector, as retailers increasingly run out of headroom to mitigate rising costs. Many will be hoping the government steps in to provide meaningful reductions in business rates, as well as raising the threshold at which employers’ National Insurance becomes payable. It’s also hoped that the reintroduction of tax-free shopping is brought back on the table, so the sector doesn’t miss out further on valuable retail spend.”
Introduction: Keir Starmer to push Donald Trump over steel tariff deal
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Donald Trump, who is due to arrive in Scotland on Friday for a five-day golf trip, is expected to meet with Keir Starmer early next week as the prime minister pushes to finalise their deal on steel trade tariffs.
In May, the US agreed to lift tariffs on steel imports from the UK, which currently stand at 25%. However, there are concerns that the steel must be melted and poured in the UK, which could exclude Tata Steel UK as it closed its last blast furnace last year. It has been importing steel from its sister plants in India and the Netherlands, which it then processes in the UK.
Starmer is expected to argue for building closer trade ties with the US, including cutting tariffs on Scotch whisky, according to a report by the Financial Times.
White House press secretary Karoline Leavitt told reporters this week: “On Friday morning, President Trump will travel to Scotland for a working visit that will include a bilateral meeting with Prime Minister Starmer to refine the historic US-UK trade deal.”
The talks will come after Stamer sealed a tradel deal with India on Thursday. The agreement, which is the biggest struck by Britain since Brexit, will cut back the cost of India’s tariffs for the UK and improve exports of products such as Scotch whisky and cars.
Starmer told Bloomberg that his government had “re-established the place and position of the UK on the world stage.”
“We’re seen as a country which other countries want to be working with and delivering with.”
The agenda
-
7.00am BST: ONS retail sales data
-
7.00am BST: NatWest Q2 results
-
11.00am BST: Nationwide AGM