Week Ahead (29 July)

Tuesday, 30 July – Spanish Prime Minister Pedro Sanchez to testify over his wife’s alleged corruption case; opposition calls for his resignation

Tomorrow, Spain’s Prime Minister Pedro Sanchez will testify as a witness in an investigation into alleged corruption and influence peddling accusations against his wife, Begona Gomez. These allegations had previously led Sanchez, who leads a minority Socialist government since November, to consider resigning in April.

The proceedings are part of a preliminary investigation into whether Gomez used her position as the prime minister's wife to secure sponsors for a university master's degree course that she ran. Judge Peinado stated that Sanchez's testimony would be "convenient, useful, and relevant" for determining whether there was influence peddling involved. In April, when the court opened the investigation, Sanchez took a five-day break from his duties to consider whether to resign but ultimately decided to remain in office.

Notably, this marks the first time a sitting Spanish prime minister has been called to testify in a judicial case since 2017, when Mariano Rajoy, then-leader of the conservative People's Party (PP), was summoned as a witness in a corruption case. That case resulted in the conviction of several members of his party and led to a 2018 vote of no confidence in Rajoy.

Alberto Nunez Feijoo, the current PP leader, highlighted the parallel to Rajoy's case by recalling how Sanchez had urged Rajoy to resign at the time. Feijóo has now called for Sanchez to step down. However, Sanchez has denied any wrongdoing by his wife, and no charges have been filed against Gomez, who has not commented publicly on the case.

Wednesday, 31 July – Eurozone flash inflation estimate for July

On Wednesday, Eurostat will release its flash inflation estimate in the euro area for July.  In June, inflation eased to 2.5% meeting market expectations and following a temporary uptick in May, where it rose to 2.6% from 2.4% the previous month. Excluding food and energy, core inflation decreased from 2.9% year-on-year in May to 2.8% in June, also in line with expectations.  Even though the above data likely reinvigorated the more dovish elements of ECB’s Governing Council (GC), the Bank decided on 18 July to keep interest rates unchanged, after cutting them for the first in five years in June, from an all-time high of 4% to 3.75%.

Nevertheless, several of GC’s members have hinted at a likely interest rate cut in the next monetary policy meeting in September. Earlier this month, the Dutch central bank chief Klaas Knot, acknowledged that the September meeting will be "open" to discussions on further easing. Following last week’s monetary policy meeting, ECB President Christine Lagarde also said that the next meeting remains 'wide open,' whereas its vice-president Luis de Guindos argued that the Bank will have more data in September to weigh a potential new rate cut. According to the latest Reuters survey (4-11 July), 69 out of 85 economists expected the ECB to cut the deposit rate twice more this year, in September and December, despite record-low unemployment and elevated wage growth.

Consequently, the release of the latest inflation data this week will provide the market with a better indication of what to expect in September’s monetary policy meeting.

Thursday, 1 August – Bank of England committee to decide on interest rates; MPC appears split on whether to drop rates for the first time in

The  Monetary Policy Committee (MPC) of the Bank of England (BoE) will meet on Thursday, with the committee sharply divided on the direction of interest rates. On one side, hawkish members like Catherine Mann and Jonathan Haskel have emphasised the persistence of inflationary pressures, giving a clear signal they are unlikely to vote for an interest rate cut in August. Earlier in July, Mann highlighted that while inflation falling to the BoE's 2% target in May was notable, this reduction was merely "touch and go," with inflation likely to rise above that rate for the rest of the year. She pointed out that growth in wages and services prices were still inconsistent with the BoE's target. Similarly, BoE policymaker Jonathan Haskel expressed concerns over cutting interest rates from their current 16-year high, adding that he would prefer to hold rates until there is more certainty that underlying inflationary pressures have sustainably subsided.

In contrast, Swati Dhingra, one of MPC’s most dovish members, argued in an interview on 15 July for an interest rate cut at the next meeting on 1 August to ease pressure on households and businesses. Dhingra has been a consistent advocate for cutting interest rates, noting that inflation had fallen sharply and was on track to moderate further in the coming months. She pointed out that the consumer prices index (CPI) eased to 2% in May, down from 2.3% in April, hitting the Bank’s target. However, she also acknowledged that inflation might rise later this year, which "matters for my decision making."

Thus, ONS data released on 17 July, showed that inflation in June held steady at 2%, defying forecasts for a slight fall and marking the second consecutive month at this rate. As a result, Investors have lowered their expectations of a BoE rate cut to about 35%, down from just under 50% before the release of the data.

Friday, 2 August – EU AI Act to become law

On Friday, the EU’s flagship AI Act will enter into force, following its publication in the EU’s official journal earlier this month.  The overall aim of the AI Act is to establish harmonised rules on artificial intelligence that prioritise human oversight and ensure safety, transparency, traceability, non-discrimination, and environmental protection. The Act is a set of proposed regulations, unveiled by the Commission in April 2021, laying out uses of AI that are prohibited, as well as guidelines for the use of AI that are considered ‘high-risk’, by outlining a different set of rules tailored on a risk-based approach with four levels of risks: (I) unacceptable risk AI, (ii) high-risk AI, (iii) limited risk AI, (iv) minimal risk AI. The AI Act is seen as a crucial step in ensuring that AI is developed and used in a way that respects EU values and protects citizens' rights.

Unacceptable risk AI systems are systems considered a threat to people and will be banned with immediate effect upon the Act’s enforcement. Examples include AI systems that manipulate human behaviour to circumvent users’ free will, social scoring by governments, and real-time biometric identification systems in public space, with certain exceptions for law enforcement.

High-risk AI applications, including AI systems used in critical infrastructure, will be subject to greater regulatory scrutiny, followed by limited-risk AI applications, such as chatbots, which must adhere to a series of transparency obligations. The entire AI Act will apply from 2 August 2026, except for provisions on high-risk AI systems used as a safety component, which will apply from 2 August 2027.

As the world’s first effort to regulate general purpose AI tools like Gemini and ChatGPT, AI Act marks a significant step towards standardised and comprehensive AI regulation. Therefore, it has the potential for broad-reaching effects in the global AI landscape, by setting global compliance standards: International companies dealing with AI will need to align with the provisions of the AI Act to conduct business within the EU. This alignment could effectively establish the AI Act as a de-facto global standard for AI practices, encouraging companies worldwide to meet its stringent requirements.