MNI INTERVIEW: US Tariffs Early Test For UK's Burnham

U.S. tariffs have delivered an early foreign policy dilemma to new UK Prime Minister Andy Burnham, who has to decide whether to follow the lead of his predecessor Keir Starmer and attempt to placate President Donald Trump or to try to forge a potentially expensive centre-left path, a former senior UK diplomat told MNI.

Burnham is due to host Trump when the UK chairs the G20 next year, and has already invited the U.S. president to visit Manchester, former permanent UK representative to the EU Sir Ivan Rogers noted in an interview.

The 10% tariff announced on imports from the UK and dozens of other countries, for allegedly failing to prevent imports produced using forced labour, were entirely predictable, Rogers said.

“We are back into the question of does Burnham act in essentially a rather similar way to Starmer and try and do a better and earlier deal? In a sense you're just going back to going back to the status quo," Rogers said. "But is there much mileage in that? What do you deliver via that? Can the UK afford actually structurally to be in much of a different position from Starmer.”

Washington could use negotiations over trade to further try and force London to a more closely aligned China policy, said Rogers, though he saw a good chance that the new tariffs will also be struck down by the U.S. Supreme Court. While the new levies do not much affect the relationship between London and Washington, in his view, they add to uncertainty.

"Bear in mind the U.K. chairs the G20 next year, which will be a big moment on the world stage for Burnham. So he's got this rather difficult balancing act of demonstrating to his own party and to his supporters and to his base that he's prepared to be tougher with the U.S. than Starmer was and repositioning the party as a genuine party of the center left.”

CONTINUITY

On the surface, Downing Street's trade negotiating team is unchanged under Burnham, with Varun Chandra remaining in the trade representative role. Chandra’s continuity in the role, and the expected appointment of Karen Pierce, a former UK ambassador to the U.S., to a senior Foreign Office role, could help smooth communications with Washington, which has been angered by Burnham’s appointment of former Energy Secretary Ed Milliband as his foreign secretary.

"They're probably slightly horrified that he's turned up as Foreign Secretary. Would the Miliband/ (Marco) Rubio relationship work well? Quite hard to see it working terribly well, but you know, Karen, if she emerges as the Permanent Secretary, may be instrumental in trying to keep that relationship going," said Rogers, who also served in the Cabinet Office under a previous Labour government. 

MNI INTERVIEW: UK Fiscal Boost And Cost To Thames Water Buyout

Renationalising Thames Water would help the UK government to meet one of its fiscal rules, while making it harder to meet the other, although the different options available to deal with the heavily-indebted company would likely have little impact on inflation, a former chief accountant for National Grid plc told MNI. 

Revenue from a nationalised Thames Water would feed into government coffers, Martin Wheatcroft noted in an interview.

Renationalisation "should be positive for your ...current budget surplus [by 2029/30], which is the first fiscal rule ... but it should be negative for ... the second fiscal rule, which is to have capital investment under control [by 2029/30]," Wheatcroft said.

Servicing costs on Thames Water's debts approaching GBP20 billion are driving the business cash-negative, leading to speculation as to whether the government will renationalise the company, put it into special administrative measures, or tighten regulation. Andy Burnham pledged to "build a new economy where we put life's essentials back under stronger public control," after becoming Prime Minister on Monday. 

"Thames Water arguably is not worth very much at all because it is cash negative. So you could argue it may not even have a positive value, but acquiring its debts would add to debt stock," Wheatcroft said.

"The bigger issue though is that generally once you bring these businesses into the public sector, they become subject to the process of capital investment controls in terms of what the Treasury does to them.” (See MNI INTERVIEW: UK Fiscal Rules Allow Loan Lift- ex-OBR's King)

ALTERNATIVE PATHS

Temporarily placing the company into special measures should not affect the fiscal picture, he added.

"That happens in the private sector all the time. We don't bring the companies into the balance sheet purely because it's a government-appointed administrator. It would only be if we decided that the best way to deal with this is for the government to become an investor," he said.

"In theory, the ownership shouldn't really determine the household bills because it's determined really by regulators setting the [pricing] formula."

Private owners might react badly to an attempt to change the formula, he said.

"The challenge is that if you want to bring bills down, you either need to subsidise, and there isn't much money around generally in the public finance of the moment, so that's not really a sensible use of public resources. Or you cut investment, and of course, you know the real issue at the moment is there's been under investment." (See MNI INTERVIEW: UK Energy Price Aid Could Be Cheaper This Time)

Household water bills comprise 1.176% of the Office for National Statistics' CPI weights. The latest UK inflation print was 2.6%, the lowest since March 2025 and above the Bank of England's 2% target.

MNI INTERVIEW: Ex-BoE Bean Skeptical Of Consensus Fed Forecast

The Federal Reserve’s dot plot is fundamentally flawed, but replacing it with a consensus forecast comes with major structural hurdles, former Bank of England Deputy Governor Charles Bean told MNI as new Chairman Kevin Warsh prepares to take a fresh look at how the Fed conveys policy deliberations and decisions in an uncertain economic climate. 

The Summary of Economic Projections is an "unsatisfactory comms device" because it creates false certainty and blurs critical distinctions, said Bean, who previously served alongside former BoE Governor Mervyn King, one of three leaders of Warsh’s communications task force.

"It conflates a view of the economic outlook together with the appropriate policy response to it -- the 'reaction function.' Both of these can differ across committee members, and ideally, you want to unpick them," Bean said in an email interview. 

Echoing critiques from King, whose view that central bank rate-forecasting damages credibility given genuine uncertainty aligns with that of Warsh, Bean nevertheless noted that the FOMC as a whole may resist abandoning the established framework. Warsh has said he won't submit forecasts to the dot plot as chairman.

If the Fed were to scrap its rate projections, finding a suitable alternative won't be straightforward, Bean said. He's skeptical the Fed could adopt a Bank of England or Riksbank-style consensus forecast model due to the decentralized structure of the U.S central bank. 

The FOMC comprises 12 regional Fed presidents, only five of whom vote at any given time, making joint consensus modeling logistically complex, he said. (See MNI INTERVIEW: Warsh Could Overhaul SEP, Drop Dot Plot - Lewis)

ALTERNATE PATHS

Bean advocates using conditional scenario analysis featuring alternative interest rate paths. 

King has warned central banks can harm their credibility by forecasting unpredictable future rate paths. But Bean said: "Mervyn’s credibility issue arises primarily because the future is highly uncertain, and not so much because policy may differ somewhat for a particular path for the economy. Talking about potential policy choices conditional on a particular economic scenario unfolding is not subject to the same shortcoming."

Explicit commitments by the central bank during normal economic cycles are unnecessary, but forward guidance may still be useful in extreme conditions, Bean said. 

"It’s potentially useful at the interest rate effective lower bound, not so much in normal times. Same with quantitative easing of course," Bean said. "So keep it as an emergency weapon." (See MNI INTERVIEW: Warsh Set To Dial Back Fed Guidance - Swanson)

MNI INTERVIEW: UK Consumer Enjoys July 'Burnham Bounce' - GfK

Better weather, an England World Cup run and a "Burnham bounce" all helped UK consumer confidence recover in July, but plenty is needed from the government to maintain the sentiment boost, the head of leading survey group told MNI.

There were "hopes at the start of July that the Middle East conflict might stabilise and bring UK fuel prices down," Neil Bellamy, Consumer Insights Director at GfK, said, adding that "the feel-good factor of the FIFA World Cup, and the summer heat wave" all helped reinforce a pick-up in sentiment.

And while former Manchester mayor Andy Burnham didn't take over in 10 Downing Street until just after the current survey period ended, "the sense of a fresh start following the appointment of a new prime minister surely accounts for some of this bounce," Bellamy said.

The headline GfK Consumer Confidence Overall Index Score was up six points to -17 in July, the largest month-on-month points increase in consumer confidence since November 2023. 

However, Bellamy underlined that the improved Overall Index Score remained within the narrow range seen since the end of 2023, and that it is now a decade since the headline score was in positive territory. UK growth is flatlining, he noted. (See MNI INTERVIEW: Even UK Young Pessimistic On Consumption - GfK )

CHALLENGES

For the “Burnham bounce” to be sustainable and boost consumer confidence, it will require consistent delivery by the refreshed UK government against deep cost-of-living challenges and persistent low economic growth," Bellamy said.

Underlining the improvement in consumer confidence, the Major Purchase Index increased eight points to -12 in July, which is three points higher than July last year. However, The Savings Index -- often reflective of consumer unease but not a full component of the overall index -- is up seven points to +27.

MNI: Beijing To Rely On Targeted Measures In H2 - Advisors

Chinese policymakers are likely to rely on targeted support in H2 rather than broad-based stimulus despite Q2's slowdown, with the economy still on track to meet this year's 4.5-5% GDP growth target, advisors told MNI, adding any additional special treasury bond issuance would likely total less than CNY1 trillion.

Authorities can achieve the target provided they maintain the current "proactive fiscal stance" and accelerate budgeted spending, and infrastructure project landing, in the absence of drastic changes in the external environment, said Zhao Xijun, co-dean of the China Capital Market Research Institute at Renmin University. Zhao rejected calls from some economists for up to CNY2 trillion of additional special treasury bond issuance after Q2 GDP growth slowed to 4.3%, arguing policymakers are more likely to focus on implementing existing measures than unveiling fresh stimulus. With H1 growth at 4.7%, the economy remains on track to meet the annual target, he said.

General public budget expenditure rose 1.5% y/y in H1, behind the budget's implied 4.4% pace, while revenue increased 4.7%, resulting in an increase of CNY971.5 billion in fiscal deposits in H1, Zhao noted.

Lian Ping, director of the China Chief Economist Forum, expects any additional special treasury bond issuance to total CNY500 billion-CNY1 trillion moderately, while calling for the consumer goods trade-in programme to be expanded to cover services. Fiscal policy remains substantially supportive while authorities should accelerate planned government investment projects, Lian said, noting that slower issuance of local government bonds and stricter project management were key factors dragging down fixed-asset investment in Q2.

"It is unlikely to roll out another round of stimulus of the same magnitude – systemic and comprehensive in scope – as the one introduced in H2 2024," he said. (See MNI INTERVIEW: China's Econ Restructure Needs More Support)

MONETARY POLICY

Both advisors questioned the effectiveness of a broad-based interest rate cuts despite rising expectations for further PBOC easing, arguing monetary policy has relatively limited scope to revive the weak consumption and investment that dragged on Q2 growth.

While Lian did not rule out a symbolic 10-15bp policy rate cut, he said policymakers would proceed cautiously, as weak credit demand and imported inflation risks stemming from uncertainty in the Gulf could reduce its effectiveness. Instead, the PBOC is more likely to maintain ample liquidity through multiple tools to lower banks' funding costs and guide market interest rates lower, he added, pointing to the central bank's record CNY1.4 trillion six-month outright reverse repo operation in mid-July.

REAL ESTATE

Rather than cutting policy rates, authorities could drive down the five-year Loan Prime Rate – the benchmark for many mortgages – and guide commercial banks to reduce mortgage rates via regulatory requirements, Lian argued. 

The property downturn continues to weigh on consumption, while signs of stabilisation remain weak and largely confined to a handful of major cities, he added. However, banks have limited room to lower mortgage rates without undermining profitability, reducing the effectiveness of such a policy. "Banks need to maintain profitability to deal with non-performing assets," Lian continued.

Gong Liutang, director of the Institute for Advanced Study at Wuhan University, said there is scope to cut the five-year LPR by 10-20bp from the current 3.5%, which the PBOC left unchanged this week for a 14th straight month. He also called for further reductions in outstanding mortgage rates to help repair household balance sheets.

The weighted average interest rate on newly issued housing loans was about 3.1% nationwide in June, compared with 2.6% for first-home loans above five years financed through the housing provident fund.

Zhao argued, however, that lower borrowing costs alone would not revive housing demand given the quality of existing housing supply. Because repairing household balance sheets will take time, authorities should simultaneously support other asset prices, particularly by encouraging stable long-term capital to flow into the stock market, helping offset losses in the property sector, he concluded.

MNI INTERVIEW: RBNZ Will Need 4% OCR By Mid 2027 - Ex Advisor

The Reserve Bank of New Zealand is likely to need to lift the Official Cash Rate from its current 2.5% to around 4% by the middle of next year to return core inflation to the 2% midpoint of its target range, former senior adviser Leo Krippner told MNI, adding that the Bank's estimate of the neutral rate is too low.

Krippner, now a research fellow at Singapore Management University, said the RBNZ's assumption that the OCR would peak at around 3.3% underestimated the amount of tightening required, reiterating his argument from 2025 that the neutral rate is closer to 3.75%-4.0%. (See MNI INTERVIEW: RBNZ's Neutral Estimate Too Low - Ex-Economist)

"The OCR needs to move above neutral to put sufficient downward pressure on core inflation," he said, noting that underlying price pressures remain stubborn, with core inflation still running around 2.5% in Q2, despite the 4.1% headline inflation read broadly in line with the Bank's May forecast.  

"The Bank clearly recognises it still has work to do, but its projected peak in the OCR looks curious given inflation remains above target," Krippner argued.

Financial markets currently expect the OCR to reach around 3.5% by May 2027, but Krippner argued even that may prove insufficient. Without moving policy into restrictive territory, the Bank would instead have to rely on spare capacity, including a negative output gap and elevated unemployment, to complete the disinflation process.

FINAL HALF-PERCENT

Krippner said that central banks consistently underestimate how difficult it is to reduce inflation from around 2.5% to their 2% targets. "It's just whether or not they want to make the effort of getting the last half percent down to 2%. At the moment, their forecasts do have it going down to 2% but that's almost automatic. If you're not going above neutral, then how much downward pressure are you actually putting on inflation to wring that last half a percentage point out?"

He said core inflation does not typically fall by itself. "You have to do the work if you're serious about returning inflation to target," he added, warning a failure to eliminate the remaining inflationary pressure could ultimately lift long-term price expectations and bond yields. 

"At the moment, I don't think central banks should be anticipating that inflation will naturally come down," he continued. "If markets conclude central banks are content with inflation settling around 2.5% rather than 2%, long-term interest rates will remain structurally higher." Higher government borrowing worldwide is already pushing up term premia, while persistent above-target inflation would add a further upward bias to longer-term rates, he said.

POLICY RESPONSE

Krippner said the RBNZ eased too aggressively when it cut the OCR to 2.25%, and that policy remained well below neutral settings despite core inflation staying above target.

He also questioned why policymakers waited until July to begin tightening after signalling in May that higher rates would be required. (See MNI RBNZ WATCH: Financial Conditions Prompt OCR Hike To 2.5%)

"If the Bank already knew more tightening was needed, it would have made more sense to begin earlier." Nevertheless, Krippner welcomed Governor Anna Breman's governance reforms, particularly greater transparency around individual votes and the restoration of eight policy meetings a year.

MNI INTERVIEW: Carney To Check Trump Power Play- Ex Colleague

Mark Carney will resist Donald Trump's new "pressure tactic" of threatening more tariffs and is prepared to walk away from a new trade deal instead of offering major concessions, a former finance department colleague told MNI.

“Carney understands power, and he understands that the only way to deal with Trump is not to cave in,” said Julian Karaguesian, a McGill University lecturer who has been a special trade adviser at the finance department and an economic adviser at Canada's embassy Washington. "If we cave, they will come for more.” 

Resisting Trump demands over the month before new tariffs on CAD30 billion of exports is possible because Carney's political support is stronger than the U.S. president's, Karaguesian said. American claims of not needing products from north of the border is also undercut by signals that officials want access to Canada's critical minerals, energy and aluminum, he said.

China countered U.S. threats cutting off critical mineral supplies, which was more successful than offerings by leaders in Germany, France and the UK, Karaguesian said. “I think that behind closed doors Washington is asking in the context of CUSMA for privileged access to our water, our critical minerals, our uranium and our oil and gas,” he said. 

Canada's resistance is boosted because the economy avoided a recession many investors predicted after the first round of U.S. tariffs, he said. Inflation is also lower than in the United States even though the response to the first round of tariffs was dollar-for-dollar countermeasures. Carney's plan to double non-U.S. exports further boosts Canada's cause over the next few years, he said. (See: MNI INTERVIEW:Export Rebound Gives BOC Scant Reason To Cut-EDC)

SAVING RUST BELT VOTES

“He’s got another three years in his mandate, and so I think if we have to take more hits from the Americans as we develop our relationships with China and Europe, that by the end of the three years Carney’s calculating we may have new sources of growth.”

Trump sought a quick win to show strength to voters ahead of Congressional mid-term elections, contrasting with setbacks at the Supreme Court on tariffs and with the Iran war, Karaguesian said. New tariffs are a "pressure tactic" in the short run but Karaguesian said the U.S. will come back with bigger demands as talks pick up. “They still see squeezing us as the path of least resistance to some kind of concessions victory,” he said. 

An inability to compromise on major sticking points like autos, steel, digital taxes and dairy subsidies leaves little prospect of a breakthrough anytime soon, Karaguesian said. “I don’t think they are going to give back steel because steel is in the Rust Belt states, and those are swing states.” (See: MNI INTERVIEW: Carney-Trump Deal Will Include Tariffs-Chamber)

Carney would likely pay a political price if he erodes Canada's "supply management" of dairy and poultry, Karaguesian said, which is popular in vote-rich Quebec. 

RUTHLESS GREAT POWER

Canadian leaders are also missing the bigger point that the U.S. has been "thickening" the border with its northern neighbor since the 9-11 terror attacks, he said. 

“I don’t think a broad deal can be worked out, unless we’re willing to have a completely asymmetric trade deal where we give a lot of concessions,” he said. “Unless Trump caves in and they relent a bit on us, I don’t just see a successful agreement in the near future.”

One area where Canada could give up something without much pain is participating in supply chains with the Detroit-based automakers, Karaguesian said. Most of Canada's domestic assembly is now done by Japanese-based firms and the total number of cars made in Canada has tumbled over time, he said. Similarly, the U.S. can't supply its own aluminum needs and is already signaling it will ease tariffs on Canada, he said.

Failing such compromises, another way to resist is signing more defense contracts with European suppliers instead of American firms, Karaguesian said. Carney says the U.S. used to get about four out of every five dollars of that work, and that era is ending as relations become less stable. 

“This is a ruthless Great Power, and the way you deal with it, you fight back,” Karaguesian said. "He actually is prepared to walk away from a bad deal, and he’s prepared to have no deal over a bad deal.”