Bank of England Set to Hold Interest Rates at 3.75%

The UK's critical defence investment plan is facing significant delays, stalling the next-generation Tempest fighter jet program and raising questions about how the military will address a reported £28 billion funding gap.

Originally scheduled for release last autumn, the defence investment plan (DIP) has been repeatedly postponed, creating uncertainty over the future of the UK's armed forces.

A "Bigger Task" Than Expected

Luke Pollard, the minister for defence readiness and industry, defended the hold-up, describing the plan as "a bigger task than many people outside defence realise." He explained that the government is not simply replacing old equipment but undertaking a fundamental restructuring of the military.

"It will mean fundamentally changing the shape of our armed forces, so pivoting, in particular, towards more autonomy," Pollard stated. He also highlighted the need to replenish military stockpiles depleted by aid sent to Ukraine, emphasizing, "It is not a simple matter of just replacing tank A with tank B."

Luke Pollard, minister for defence readiness and industry, highlighted the military's shift towards greater autonomy as a key component of the delayed defence investment plan.

The plan is designed to outline the funding for the strategic defence review (SDR), a blueprint for modernizing the military in response to growing threats from Russia and increasing NATO commitments.

The £28bn Funding Gap

Despite ministers accepting the SDR's recommendations last June, the military's top official, Air Chief Marshal Sir Richard Knighton, warned Members of Parliament last month that defence cuts would be necessary without additional funding. The military faces a potential £28 billion shortfall over the next four years.

The funding challenge has become a high-level political issue. Keir Starmer reportedly met with advisers to find a solution, with one option being to relax Chancellor Rachel Reeves's fiscal rules to allow for more defence spending. However, a government spokesperson has maintained that the fiscal rules "are non-negotiable."

Pollard declined to address the speculation, stating, "it was not right for me to comment on leaks." He added that both he and the defence secretary want the plan released soon but acknowledged, "we've still got more work to do to finalise it."

He blamed the previous Conservative government for budget overruns and project delays, asserting, "This is our moment to … put our finances on the right path."

Impact on the Tempest Fighter Jet Program

The delay is having a direct impact on the global combat air programme (GCAP), a trilateral project with Italy and Japan to develop the Tempest, the UK's next-generation fighter jet.

A key contract for the program was expected to be signed last year but remains on hold pending the publication of the investment plan.

Pollard confirmed the connection, stating that the government has "plans to invest in GCAP and that is part of the consideration within the DIP." He noted that while GCAP is a crucial program for replacing the current Typhoon jet, its progress is tied to the broader financial strategy.

Separately, Pollard announced an £80 million government investment to subsidize university programs in fields vital to defence, such as engineering and computer science, in an effort to address a critical skills shortage in the sector.

North Korea is entering 2026 with a stronger sense of security than it has had at any point since the Cold War. This confidence is underpinned by a state campaign, now in its sixth year, to tighten its grip on the domestic economy. While some observers see the country's market economy shrinking under government pressure, the reality on the ground appears more complex.

The State vs. The Market: A Balancing Act

Gaining a clear picture of North Korea's internal economy is notoriously difficult due to the regime's information blockade, which has intensified since the COVID-19 pandemic. However, anecdotal reports provide valuable insights. Conversations with North Korean defectors in Seoul during 2025 painted a consistent picture: markets are still functioning much as they have since the early 2000s, and food supplies are relatively stable.

This view is supported by reports of expanded greenhouse farming, efforts toward price stabilization, and persistent demand for imported consumer goods. The overall strategy seems to be one of state tolerance and regulation for small-scale market activity, while larger, more profitable enterprises are being forcibly integrated into the official state economy.

Tightening the Reins on Private Enterprise

The government continues to assert greater control over the semi-private market. Private entrepreneurs who contract with state entities for legal cover or access to facilities like factories and retail spaces are particularly vulnerable. In a significant move in November 2025, authorities ordered all private businesses operating from state-owned properties to be absorbed into the official commercial network.

Despite these measures, the government has stopped short of a full-scale shutdown of the market system. While the state has expanded its role in food distribution through state-run grain centers since 2020, legal changes in 2022–2023 suggest a pragmatic approach. These changes strengthen farmers' autonomy in production and investment, implying they will sell a portion of their grain to the state rather than having it forcibly seized at artificially low prices.

Still, the economy is not without risks. Reports of dampened market activity suggest that increased state control may be negatively affecting ordinary people. Furthermore, the informal exchange rates for the North Korean won against the US dollar and Chinese yuan experienced sharp fluctuations throughout 2025.

Deepening Ties with Russia Fuel the Regime

North Korea's strengthening relationship with Russia could empower Kim Jong Un to tighten economic controls even further.

Official trade between the two nations surged, increasing nine-fold from 2022 to 2023 and rising another 54 percent in 2024. Although these increases started from an extremely low base—trade was just US$3.8 million in 2022, or 0.2% of North Korea's total—the trend is significant. If it continues, Russia could become a vital source of revenue, potentially rivaling China in its importance to the regime's survival.

Military Exchange and Cyber Heists

Military cooperation is the most critical aspect of the Russia-North Korea relationship. While much of the exchange is secret, North Korea's sale of vast quantities of munitions and the deployment of over 10,000 troops to support Russia's war in Ukraine are well-documented.

Instead of cash, Russia appears to be paying primarily with military technology, fuel, and food shipments. While these transactions likely helped stabilize North Korea's economy in 2023–24, there is little evidence of any broader benefit to the civilian population.

Simultaneously, the North Korean state is growing wealthier from illicit activities. Revenue from cybercrime and cryptocurrency heists was estimated at over US$2 billion in 2025 alone. These hard-to-trace funds are expected to continue financing the state's top priorities.

Maintaining the Relationship with China

Critically, North Korea's stronger ties with Russia do not appear to have come at the expense of its relationship with China. Beijing has concerns about North Korea's military capabilities growing beyond its control with Russian support, but the fundamental structure of the Pyongyang-Beijing relationship remains intact.

China continues to supply a steady stream of oil and fuel to meet North Korea's basic needs. In fact, trade between the two countries rose to its highest level since 2019.

Kim Jong Un's Newfound Flexibility

The new income streams from Russia and cybercrime do not necessarily mean North Korea will abolish its market system. However, this revenue provides the regime with greater flexibility to suppress certain economic sectors, using its own resources to compensate for any resulting supply shortfalls.

As the international system shifts toward bipolarity and great power competition intensifies, North Korea has become an increasingly valuable strategic asset for both China and Russia. With finances less of a constraint, Kim Jong Un may feel emboldened to increase state suppression of economic activity while advancing his nuclear and missile programs with fewer restraints. Whatever path he chooses, he now has far more policy options than at any other time in recent decades.

Federal Reserve Governor Lisa Cook has made it clear that her primary focus is on tackling stalled inflation, signaling that she will not support another interest-rate cut until price pressures ease.

In a speech to the Economic Club of Miami, Cook identified stubborn inflation as a greater risk than any weakness in the labor market. "At this time, I see risks as tilted toward higher inflation," she stated, reinforcing the central bank's recent decision to hold its policy rate steady.

Inflation Plateau Creates Policy Hurdle

The Federal Reserve’s progress on bringing inflation back to its 2% target has hit a wall. According to Cook, core inflation, which excludes volatile food and energy prices, was running at about 3% at the end of last year.

"Such a plateau is frustrating after seeing significant disinflation in the preceding few years," Cook said.

This persistent, above-target inflation is the main obstacle to any further monetary easing. Cook emphasized that the Fed's credibility is on the line. "After nearly five years of above-target inflation, it is essential that we maintain our credibility by returning to a disinflationary path and achieving our target in the relatively near future," she explained.

Labor Market Strength Allows Inflation Focus

While inflation remains a concern, Cook views the labor market as stable. The unemployment rate stood at 4.4% in December, significantly below the 50-year pre-pandemic average of 6.2%.

She noted that the three interest rate cuts implemented last year, which brought the federal funds rate to its current range of 3.50%-3.75%, will continue to support employment. With the labor market on solid ground, the Fed has the leeway to concentrate on price stability.

"Until I see stronger evidence that inflation is moving sustainably back down to target, that is where my focus will be, in the absence of unexpected changes in the labor market," Cook concluded.

Uncertainty Looms Over Future Policy

Looking ahead, Cook acknowledged significant uncertainty, particularly regarding tariff policy and its impact on goods prices. While she expressed optimism that these effects will eventually fade and allow inflation to fall, the path forward is not guaranteed.

Another key risk is the possibility that public expectations of higher inflation could become entrenched, making it harder for the Fed to achieve its goal.

Cook’s hawkish stance aligns with her consistent voting record. Since joining the Fed in 2002, she has always voted with the majority and Fed Chair Jerome Powell on interest-rate decisions. Her latest comments come amid political pressure from President Donald Trump, who has advocated for more aggressive rate cuts and nominated Kevin Warsh, a proponent of lower rates, to potentially succeed Powell. The President also attempted to remove Cook from her position, an effort she is currently challenging at the Supreme Court.

After multiple rounds of stalled negotiations, the United States and India have finalized a major trade deal, breathing new life into a floundering relationship. The agreement is a significant win for India's economy, as it slashes tariffs on products exported to one of its largest markets from 50% down to 18%.

The breakthrough comes alongside critical developments across South Asia, including escalating violence in Pakistan's Balochistan province and a new Indian budget that doubles down on manufacturing and defense.

The US-India Trade Breakthrough

The central question surrounding the new trade agreement is simple: why now? For years, India resisted granting greater access to politically sensitive sectors, particularly agriculture, which consistently derailed previous talks.

A History of Political Friction

Recent history has been marked by diplomatic tension. U.S. Commerce Secretary Howard Lutnick claimed that a deal was held up last summer because Indian Prime Minister Narendra Modi was unwilling to call President Donald Trump—a charge India has disputed. Some analysts also point to Trump's frustration over not receiving credit for his role in an India-Pakistan cease-fire as another obstacle.

However, the key concessions Trump cited as deal-makers were made long ago. India had already reduced its Russian crude imports following new U.S. sanctions last November, and its overall imports from the United States have been rising for years. This suggests another factor was at play.

The 'Gor Factor': A New Envoy's Impact

Much of the recent momentum can be traced to one individual: Sergio Gor, the new U.S. ambassador to India and White House special envoy. Since arriving in New Delhi, Gor has projected a strikingly positive tone about the partnership, marking a clear shift from the previous administration's approach.

Gor has engaged in a flurry of high-level meetings with key Indian officials, including:

• External Affairs Minister S. Jaishankar

• Commerce Minister Piyush Goyal

• Reserve Bank of India Governor Sanjay Malhotra

• Top military leaders

• Maharashtra Chief Minister Devendra Fadnavis

He was also instrumental in securing an invitation for India to join Pax Silica, a U.S.-led silicon supply chain initiative, after it was initially left out. Though not a career diplomat, Gor is a vocal supporter of the U.S.-India relationship, describing it at his Senate confirmation hearing as one of America's most important strategic partnerships. His influence in the White House and direct line to the president likely cleared the final hurdles.

Domestic and Geopolitical Pressures

Other factors may have also pushed the deal across the finish line. With tariffs contributing to rising food inflation in the United States, Trump likely had domestic political incentives. Additionally, the White House may have been concerned about India's new free trade agreement with the European Union.

Ultimately, the deal provides a platform for future progress and could pave the way for a delayed Quadrilateral Security Dialogue summit in New Delhi. With a tangible achievement to celebrate, Trump on Monday called Modi one of his "greatest friends."

Regional Security and Economic Shifts

Beyond the trade deal, other major events are reshaping the region's landscape.

Violence Escalates in Pakistan's Balochistan Province

The Balochistan Liberation Army (BLA) launched a series of coordinated attacks last Saturday across the province, including in the capital, Quetta. The violence resulted in the deaths of nearly 50 people, including 31 civilians. Pakistan's military reported that its response killed at least 145 BLA fighters, marking one of the deadliest episodes in the region in years.

While the Tehrik-i-Taliban Pakistan (TTP) often dominates headlines, the BLA has quietly strengthened its capabilities. The separatist group has successfully used local grievances over resource exploitation and state crackdowns to fuel its recruitment drives. Its effectiveness was demonstrated last March when it hijacked a passenger train. Pakistani authorities have so far struggled to contain the BLA, relying on military operations that fail to address the underlying drivers of the insurgency.

India's 2026-27 Budget Focuses on Tech and Defense

Indian Finance Minister Nirmala Sitharaman unveiled the government's 2026-27 budget, which pivots away from the populist measures of the previous year, such as middle-class tax cuts. Instead, the new budget prioritizes spending on infrastructure and manufacturing.

Key sectors set to receive a boost include semiconductors and rare-earth magnets, positioning India to compete in the modern global economy. The budget also allocates a record $85 billion to defense, a 15% increase from last year. This sharp rise is likely a response to last May's conflict with Pakistan and a strategic hedge against uncertainties in its partnership with the United States.

A Glimmer of Hope for Pakistan's Economy?

A recent Gallup survey suggests public sentiment in Pakistan is slowly improving, though it remains broadly negative. The poll, published Monday, found:

• 31% of Pakistanis felt their living standards were improving in 2025, up from a low of 15% in 2023.

• 25% believed the overall economy was getting better, compared to 12% in 2024.

• Approval of the country's political leadership rose to 36%, up from 22% the previous year.

These figures align with a recent stabilization of Pakistan's macroeconomy. However, the country continues to face high poverty rates and widespread public anger over increasing political repression.

Geopolitical Maneuvering in the Indian Ocean

In an interview with Newsweek, Maldivian President Mohamed Muizzu made a direct pitch to President Trump concerning the strategically vital Chagos Islands. Muizzu proposed that if sovereignty of the archipelago were transferred to the Maldives, he would guarantee the United States could continue using its military base on Diego Garcia.

Last year, the United Kingdom agreed to eventually transfer the islands to Mauritius, a deal Washington opposed over fears it would jeopardize access to the base. On Tuesday, the UK announced it had secured an agreement with the U.S. to ensure continued access for both nations.

Muizzu's offer highlights his ambition to elevate the geopolitical profile of the Maldives, an island nation best known for tourism. The move may also be a subtle appeal to the Trump family's business interests; last November, the Trump Organization announced a partnership to develop a luxury hotel in the Maldives, slated to open by 2028.

Source: Bloomberg

Source: AP