This week, the Bank of England (BoE) met on Thursday and held interest rates steady at 4%. Markets had expected six of the nine policymakers to vote in favour of no change. However, the actual outcome—five voting to hold and four voting to cut—revealed a decision that was far more balanced, leaving the outcome on a knife edge.
Ahead of the BoE meeting, Chancellor Reeves delivered a speech that signalled a potential reversal on her previous stance against tax increases, something many had anticipated. She opened by acknowledging the challenges she continues to face, persistent inflation, sluggish economic growth, and the sharp rise in public debt since the pandemic. Thinking back to October last year, Reeves implemented a £40 billion tax hike, the largest since the 1990s, with businesses bearing the brunt. Now, with expectations that a further £26 billion may need to be raised, she warned that hard choices lie ahead.
BoE Governor Bailey kept the door open for future rate cuts, stating, “We are likely to continue to be on a gradual down path for the bank rate.” The key concern for the committee remains inflation, which has held steady at 3.8% for the past three months—possibly signalling a peak. By the next meeting, scheduled for the week before Christmas, the BoE will have access to October and November’s inflation and labour market data, as well as details from Chancellor Reeves’ budget announcement due at the end of the month. Markets are broadly aligned in expecting a rate cut in December.
The risk of an artificial intelligence (AI) market bubble was raised by several policymakers in the newly introduced summary section, part of a broader revamp of the BoE forecasting process. While it was acknowledged that AI has the potential to be a major driver of productivity and efficiency, concerns were voiced that markets may be getting ahead of themselves—pricing in future revenue streams before results have materialised. Technology companies that have positioned themselves as AI leaders have seen their equity valuations skyrocket, and sentiment now appears to be shifting, with markets increasingly anticipating a correction.
The term “circular spending” is being used more and more each week, referring to the increasingly frequent pattern of transactions among the largest AI companies. In recent weeks, firms like Nvidia, OpenAI, CoreWeave, Microsoft, and Intel have collectively spent billions of dollars on each other’s products and services. This week was no exception, with OpenAI agreeing a seven-year, $38 billion deal to purchase cloud services from Amazon. These deals continue to raise eyebrows, particularly around how OpenAI intends to fund such large-scale commitments. Amazon shares rose over 5% at the start of the week, but growing market concerns around AI valuations contributed to the S&P 500 and tech-heavy Nasdaq falling later in the week, which dragged down the US market.
The US government shutdown has now entered its 38th day, surpassing the previous record for the longest in history, as the standoff between the Republican and Democratic parties continues. Despite more than a dozen Senate votes on the budget, no lawmakers have shifted their positions. President Trump’s Republican party holds a 53–47 majority in the Senate but remains short of the 60 votes required to pass legislation. Democrats are holding firm on their demand to extend the Affordable Care Act (ACA) premium tax credits, aimed at keeping health insurance affordable. Meanwhile, the fallout from the shutdown continues to escalate; food assistance programmes have been suspended, federal workers, from airport staff to law enforcement remain unpaid, and the economy is “flying in a fog” due to the lack of economic data reporting.
Next week’s focus in the UK will be on unemployment and wage data, alongside GDP. Chancellor Reeves will be hoping for some positive growth data ahead of the budget, while a softening in wages could solidify a rate cut in December.
Nathan Amaning, Investment Analyst
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