Client Update - 23rd May 2025

It came as no surprise, given Rachel Reeves’ employer NI tax rises and an increase to the minimum wage that came in during April, that UK inflation has risen. News suggested the rise was more than expected, to a 15-month high of 3.5% in April. We also had seasonal utility bill rises to contend with as regulators raised the household price cap.

Immediately the market commentary turned to accusations that the Bank of England (BoE) has cut rates too soon and market expectations fell to perhaps only one further rate cut in 2025. Fewer rate cuts usually lead to a stronger currency, and the pound duly obliged by climbing to its highest level against the dollar since early 2022 at $1.347.

The BoE has vowed to persist with a “careful and gradual” approach to additional rate cuts after lowering borrowing costs four times since August, however the Monetary Policy Committee was split over this month’s decision to cut rates by a quarter-point to their lowest level since 2023. On Tuesday, chief economist Huw Pill said he feared the BoE was reducing rates too rapidly and that the momentum behind falling inflation was “stuttering”. The numbers came as a setback to chancellor Rachel Reeves, who has been attempting to capitalise on stronger-than-expected first-quarter growth figures as well as a trio of trade deals. Reacting to the inflation numbers, Reeves said she was “disappointed” and acknowledged that “cost of living pressures are still weighing down on working people”. She added: “We are a long way from the double-digit inflation we saw under the previous administration, but I’m determined that we go further and faster to put more money in people’s pockets.” Mmmm.

In line with these rising costs, the BoE has predicted that inflation will reach 3.7% this year before falling back to its target of 2% in 2027. But analysts warned that the April data showed signs of higher-than-expected inflation in some parts of the economy. One area of concern is rapid wage growth, with annual growth in average weekly wages running at 5.6 per cent, excluding bonuses, in the three months to March.

News this week also focussed on the EU / UK trade deal. Whilst the UK is no longer part of Europe, it does feel a little like we still are. The 46% of British trade that is done with the bloc ensures that rules made in Brussels still impinge on Britain. No other trade partner comes close to the size of trade with the UK, which is purely down to geography. To boost growth, Sir Keir Starmer’s Labour government wants to align with more of those rules, which means some loss of independence, yet UK sausages will now be heading over to Europe once more after Monday’s deal.

As for defence, Britain seeks strength in numbers with Europe at a time of Russian aggression and American aloofness, but that means paying into Europe’s rearmament fund. You feel that this is just the start. Of course, the next UK government could always unpick some of these emerging ties with the EU. Which then leads to more negotiations, and it is hard to see an end to this merry-go-round.

You feel that Britain / the UK will always have a difficult, yet crucial relationship with the EU. Life outside is too difficult, which is why no other member state has left. So is life inside, which is why no British politician of the front rank proposes full re-entry. All that remains is endless adjustment, whilst never being happy.

If we cast our minds back to 2016, the problem was that a referendum didn’t and couldn’t allow for an ambiguous view. It forced public opinion to fall into simply two camps - either Remain or Leave, when in fact millions of voters were confused on what that actually meant. With only 27% of the national vote, Starmer is being warned not to go too far, lest he provoke an electorate that chose to leave the EU less than a decade ago. However, this week it feels like he has not achieved enough, and to read about the fishing rights falling back to Europe is quite sad.

Unsurprisingly, the Conservatives screamed “surrender” at him this week, to no obvious effect. The share of Brits who think it was right to leave has been stuck at a third since 2022. Every form of reconciliation — joining the customs union or the single market or the EU itself or crafting an unspecified “closer relationship” that involves none of these three — polls much better than a harder Brexit. Whatever this prime minister achieves in his talks, European diplomacy is Britain’s future. It will be negotiating with the EU for as long as both entities exist. For the EU, this process will be a small part of its overall business. For the UK, it will be central, as each step towards the club entails some sovereign loss and each step back implies a material cost.

As always, life right now seems quite complicated, yet markets move on and year to date valuations are healthy, so I shall do my very best to find a cheery outlook to greet you all next Friday. Do have a good weekend and enjoy the bank holiday. (May bank holiday – best find my brolly!)