Burnham, Warsh, what’s in their in-trays?

So the seemingly inevitable has now happened. Following Andy Burnham’s convincing win at the Makerfield by-election, Sir Keir Starmer has announced a timetable for his exit as prime minster and leader of the Labour Party, and it is now increasingly likely that the former Greater Manchester Mayor is set to become the UK’s next prime minister. The financial market reaction to the latest news has been sanguine, as the additional risk premium associated with a change in Number 10 Downing Street has already been priced into UK government bonds, not least due to some outsized movements in gilt yields following the local elections. 

Burnham has committed himself to the government’s current fiscal rules and is set to have heavyweight economic advisors including former Conservative minister Sir Jim O’Neil and Andy Haldane, former chief economist of the Bank of England, which will no doubt somewhat reassure markets, but they will reserve their final judgement until the next budget takes place, likely in autumn. 

Elsewhere, it is important to emphasise, once again, that geopolitical developments in the Middle East have been the key driver of negative movements in UK financial markets. The news on this front from a macro perspective has been much more positive recently, with oil price futures dropping markedly on news of the provisional agreement between the US and Iran. Oil prices now sit only marginally higher across the curve compared to the situation pre-Iran war, a significant improvement from just a few weeks ago. The domestic data rolling in on inflation has also been better than expected, the backdrop of which has allowed the Bank of England to continue its “wait and see approach” by holding base rate at the current level of 3.75% in June. 

The vote was 7–2 in favour of holding rates, with MPC members Huw Pill and Megan Greene dissenting with a vote to increase interest rates. The majority advocating the “wait and see” approach emphasises the reduced upside inflation risks from geopolitical developments as well as signs that the labour market is loosening: it is notable that April’s revised payrolls figure came in at a surprisingly bad -52,000. The two hawks on the MPC worry about the increase in inflation expectations, especially among consumers, and cite evidence that it’s important to be more attentive on this front given the UK has recently experienced high levels of inflation.

So, what next? Of course, future developments in both the geopolitical and domestic political space have the potential to upset the apple cart. However, our base case view set out in May’s Global Macro Forecast Opens in a new window, which assumed a gradual re-opening of the Strait of Hormuz, is still on track. This implies that the base rate will be held for the rest of this year, but bear in mind that this would still be a response from the Bank of England to the energy price shock: prior to the Iran war, we were expecting two rate cuts in this calendar year. 

With respect to gilt yields – which were already the highest in G7 sovereign debt markets prior to the Iran war, we have recently published a macro comment with our latest view. Regrettably, gilt yields are likely to continue leading the G7 pack: the UK is very exposed to the trend of rising geopolitical risk. Domestic political risk is likely to remain priced into gilts, at least until the next budget and there is no obvious solution to the current over-reliance on overseas investors buying UK gilts. We do, however, believe that as traffic begins to increase in the Strait of Hormuz and political risk rises up the agenda in the continent next year, the spread between gilt yields and other G7 economies should narrow in the medium term. You can read the report here Opens in a new window. 

Daniel Mahoney, Senior Economist, UK

When we look at the central bank decisions in turn, a good starting point for how rate decisions and expectations have evolved is to look at the energy market, and specifically Brent crude oil prices, as talked about in previous Rate Wrap editions. With a US-Iran deal now on the table (albeit we still have a way to go before it can be declared complete), we have seen oil prices back below $80 a barrel. If all is smooth sailing, then we should see oil fall further, but some analysts are calling for a $70-75 per barrel range in this scenario, which still leaves us above where we were at the start of 2026. While there is an argument to be made that we may have seen the peak of oil prices for now, there is a risk that we haven’t seen the full impact feed through into the wider inflation data as of yet.  

Bank of England stays in wait-and-see mode

The Bank of England MPC meeting saw surprises on the vote split front, with economist forecasts matching the 7-2 vote to hold base rate at 3.75%. Hawkish members Huw Pill and Megan Greene dissented and voted for a hike, as they both have a similar view that price behaviour has shifted permanently since the pandemic, in a way that keeps inflation structurally higher. However, Catherine Mann, well-known for her hawkish comments and voting pattern, made a case for a hike but voted hold. There seems to be a growing sense among MPC members that second round inflation effects are less likely, and the data is backing that up. Given the recent US-Iran deal, along with inflation easing to 2.80% (below expectations) and consistent declines in payrolled employment and private sector wage growth, this all backs up the argument for a hold. 

Swap rates across June have tailed off from mid-month, with the 2-year SONIA swap rate down around 25bps compared to the peak within the month (as at 24/06/26). Current market pricing sees 17bps of tightening priced into November’s meeting, with one rate hike fully priced in by December’s meeting. Beyond year-end into Q1 2027, there is less than a 50% chance of a second rate hike priced in. 

And it’s not just geopolitical news that markets are keeping a watchful eye on. As Dan mentioned above, the widely-anticipated Makerfield by-election saw a win for Andy Burnham, paving the way for his bid to become the next prime minister, an event which pushed the 10-year gilt yield up 7bps on the open after the by-election. 

Concern around fiscal policy under a new left-wing leader, and what that could mean for public finances, saw a shift in sentiment, putting upwards pressure on yields. However interestingly, the resignation of Sir Keir Starmer itself saw a relatively muted reaction, given that markets have been pricing in a change of leadership for some time. 

In the aftermath of his resignation this was treated by markets as more of a resolution to political uncertainty. What matters more is what comes next. Andy Burnham now has a clear pathway to take over, and the decisions that come next around borrowing and spending could affect the longer-dated debt maturities. 

New Fed chair Kevin Warsh makes his debut

Meantime, in the US, although the Federal Reserve kept the policy rate on hold in its June meeting in a unanimous decision, there was plenty to digest as Kevin Warsh made his debut as the new chair, and the Fed on the whole saw a hawkish shift. 

One of the big surprises from the meeting was a number of FOMC (Federal Open Markets Committee) members shifting their policy rate forecasts higher, meaning the “dot plot” median rose more than expected. The “dot plot” is the chart published by the FOMC four times per year, with each dot representing the view of an individual policymaker on where they think the policy rate should be at the end of each respective year. The median forecast gives the biggest indication as to which direction the committee is leaning. June’s “dot plot” shifting hawkish shows a growing willingness among committee members that while keeping rates unchanged for now is appropriate, hikes could be on the cards if inflation continues to rise with the Middle East war impact. This signals a message that the monetary policy easing cycle is well and truly on ice, with the next move more likely to be a hike than a cut. 

The other notable takeaway was Kevin Warsh making his mark in his inaugural meeting, as Warsh did not submit his own forecast for the “dot plot”, as he does not believe in so-called forward guidance. His view argues that central banks should avoid heavily communicating their view on where policy rates should be in future, and instead markets should react to economic data themselves. 

It could be argued that this in itself may increase volatility and uncertainty due to a lack of the transparency which the Fed has built up over the past two decades, but on the other hand some would argue that it will shift investors’ focus to economic fundamentals. 

The 2-year US Treasury yield jumped 16bps in the immediate response to a hawkish dot plot, and Warsh’s stance on forward guidance. Overnight index swap pricing has shifted to fully price in a rate hike to October’s meeting, with less than a 50% chance priced in prior to the FOMC meeting. 

ECB deliver widely-anticipated rate hike

As widely expected, the European Central Bank voted to hike its target rate by 25bps to 2.25% in response to the Middle East conflict, with concern from members that inflation remains vulnerable to wider geopolitical and energy shocks. Following the decision, ECB President Christine Lagarde stated that the central bank has seen signs of de-anchoring of inflation expectations in the short term, and the wider view from the bank is that further tightening isn’t off the cards if the data justifies it. 

However, Lagarde then went on to make more dovish remarks that the ECB does not need to react more aggressively as inflation is set to return to the 2% target in the medium term. Doves within the ECB are particularly concerned around growth prospects, particularly in Germany and France where industrial demand remains weak. Germany is one of Doves’ strongest arguments against further hikes, partly due to it being the largest economy in the euro area and partly due to it struggling with high energy costs, weak demand and effectively flat manufacturing. A second hike is still priced in for later this year, with 23bps hike priced into October’s meeting. 

In summary, while the recent declines we have seen in oil prices have eased some of the concerns around inflation compared to the start of the Middle East conflict, central banks remain wary of the longer-term impact of higher energy prices. The Hawks are focusing on inflation persistence whereas the Doves are concentrating on slowing growth, a tough balancing act. As we move into the second half of 2026, any signs of persistent inflation and energy prices creeping up will be closely watched. 

Jasmine Crabb, Handelsbanken Markets