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The great divide

12 Aug 2025 | 3 minutes to read

A good week for

  • Global equities – Japanese, European and US markets led the way, rising between +2.4 and +2.6% in local currency terms. Although returns moderated in sterling terms
  • Sterling, which strengthened against the euro, the US dollar and the yen

A bad week for

  • Brent crude oil, which slid -4.4%
  • UK index-linked bonds, which declined -1.2%

Bank stands divided

The Bank of England’s (BoE) rate setting Monetary Policy Committee (MPC) voted to cut interest rates from 4.25% to 4% last week. However, the decision was only very narrowly backed by a majority of 5-4 amongst MPC members, who required an unprecedented second vote to reach a decision. This perhaps suggests that further interest rate cuts, like this one, will be somewhat more finely balanced decisions than previously thought. The prevailing rate of inflation is still well ahead of the Bank’s 2% target and is now expected to rise further - peaking at 4% in September. While inflation is higher than the Bank would like, those voting for a rate cut point to concerns about the health of the labour market. The UK’s labour market has softened due to sluggish economic growth and the impact of higher labour costs, such as a higher minimum wage level and increased employer National Insurance contributions. The extent to which services sector inflation is reducing because of a slowing labour market, and the impact of higher food and fuel prices on inflation expectations, are key areas of focus looking forward. Wage growth in the food and retail sector has been a driver of food price inflation, coupled with global factors contributing to higher agricultural commodity prices. However, wage growth is moderating, and some businesses are warning they may have to cut staff to mitigate higher costs. The conflicting data points complicate the MPC’s task. Governor, Andrew Bailey, stated that the BoE did not expect higher inflation to persist but noted the need to monitor the situation very carefully.

Chancellor can’t bank on growth

Chancellor Rachel Reeves welcomed the BoE’s move, stating that it would help to “bring down the cost of mortgages and loans for families and businesses". However, it will be the latest monthly and quarterly GDP figures published later this week which will be of greatest concern to her. The BoE now forecasts that growth for the second quarter of the year will be just 0.1% - a sharp slowdown from the growth of 0.7% recorded for Q1. Some of that slowdown reflects activity brought forward into the first quarter to avoid anticipated US trade tariffs. What the Chancellor wouldn’t give for sustained quarterly growth of 0.7%!  Sluggish growth is fundamental to the problems faced by the Treasury. A report from think tank, The National Institute for Economic and Social Research (NIESR), last week served to highlight the issue once again. The analysis suggested that the Chancellor might need to find more than £40bn at the next Autumn Budget in order to keep to her self-imposed fiscal rule of not borrowing to fund day-to-day spending. While the figures were summarily dismissed by many observers, consensus amongst independent economists is that the shortfall is a still substantial £20bn - £25bn. The upshot is that it is increasingly likely the Chancellor will have to raise tax on individual taxpayers at the next budget, rather than just on employers as was the case last October. Although, as the report from the NIESR pointed out, Labour’s manifesto pledge not to raise income tax, VAT or National Insurance on "working people" could be a stumbling block.

High tariffs high stakes

Trade tariffs remained fully in focus for US President, Donald Trump, last week, as he stated an intention to levy a 100% tariff on imported computer chips – a move which would very likely raise the cost of electronics and autos for American buyers. However, Trump is willing to exempt companies’ manufacturing chips in the US to encourage investment and to ensure the US becomes more self-sufficient in such a key area. Trump met with Apple CEO, Tim Cook, last week to discuss US investment pledges that Apple have made this year – likely to total some $600bn. The world’s largest chip maker, Taiwan Semiconductor Manufacturing Company (TSMC), and US behemoth, Nvidia, are also expected to be exempt from such tariffs. Global demand for computer chips continues to increase. But Trump’s move is not without risk. As with other tariffs (and the threat of them) the policy is in part a bet that higher costs cajole companies into opening or increasing US manufacturing facilities. However, such moves can squeeze corporate profits and could push up prices.

Elsewhere, the White House announced a 50% tariff on imports from India, doubling the existing 25% rate. The move was intended to penalise the Indian government for purchasing Russian oil. The new rate will come into effect on 27 August, leaving approximately 20 days for India to negotiate a deal, after which it will become the most heavily taxed US trading partner in Asia. The US is India’s top export market, and an additional 25% tariff could represent a hit to GDP of c.0.3%. Again, the move is not without risk, as it could encourage India to further reconsider its strategic alignment globally – perhaps deepening ties with Russia and China.

Chinese exports finding an alternative route

China’s latest trade data showed an influx of businesses looking to fulfil their orders ahead of the 12 August deadline this week, when a trade truce struck with Trump is due to end. Exports rose 7.2% year-on-year in July, well above expectations of a 5.4% rise. Imports also increased, up 4.1% over the same period, significantly outperforming an anticipated decline, and up from a 1.1% rise in June. Beneath the surface, exports to the US fell some 21.7% from this time last year. However, shipments to the Association of Southeast Asian Nations (ASEAN) rose almost 16.6% over the same period, drawing further scrutiny over the potential movement of goods through third-party countries. Any agreement between the US and China is likely to require increased Chinese spending on US energy and agricultural goods. If an agreement cannot be made between the world’s two largest economies, it is possible that very high tariffs will return. Exports have become increasingly integral to Chinese growth in recent years, when a prolonged property sector slowdown has severely dented consumer confidence.

Other insights

  • US visa bond trial: The US will launch a 12-month visa bond pilot in a few weeks, requiring visitors from high overstay rate countries to post bonds of $5,000-$15,000. The move aims to deter visa overstays

  • Tesla sales decline: Tesla registrations in the UK fell below 1,000 units in July, representing a 60% year-on-year decline, with German sales down 55%. In contrast, China’s BYD sold 3,184 vehicles in the UK, more than quadrupling its sales year-on-year, while German sales rose 390%

  • President Trump targets Intel’s chief executive: The President demanded Lip-Bu Tan resign immediately, citing ties with China and concerns about his extensive Chinese investments. Tan is set to meet with the President this week

  • BP’s biggest oil and gas discovery: BP has uncovered its biggest discovery in 25 years off the cost of Brazil. The company will carry out further exploratory tests on the Santos Basin discovery

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