10 February 2026: Bailey wants to remain cautious on rates

The Prime Minister shrugged off the resignations of two of his closest advisers yesterday and vowed to continue in the role despite calls for him to go.

The leader of Scottish Labour became the most senior member of the Party to call for him to step down in the aftermath of further revelations concerning the former UK Ambassador to the U.S., Lord Peter Mandelson and his relationship with Jeffrey Epstein, who committed suicide in prison six years ago. Potential successors in his party quickly backed him, a show of unity that is often rare on such occasions.

Members of Starmer’s cabinet quickly voiced their support for the Prime Minister in an attempt to stabilise his position as Anas Sarwar called on him to quit.

There was a significant and supportive statement from Angela Rayner, a former Deputy Prime Minister who is seen by many as a potential successor to Keir Starmer. “I urge all my colleagues to come together, remember our values and put them into practice as a team,” Rayner wrote on X. “The Prime Minister has my full support in leading us to that end.”

Government bond yields surged early yesterday as investors continued to weigh the political future of the Prime Minister amid the fallout from the Epstein crisis. They later eased, moving more in line with U.S. Treasuries.

Starmer's ‍chief of staff, Morgan McSweeney, quit on Sunday, saying he took responsibility for advising Starmer ‌ to appoint Peter Mandelson as Ambassador ‍to the U.S. despite his known links to Jeffrey Epstein.

Some in Starmer's Labour Party are openly questioning his judgment and his future, and investors are increasingly bracing for a challenge to his leadership, raising uncertainty over the path of British fiscal policy.

Yesterday, Starmer's director ⁠of communications, Tim Allan, also resigned.

There was also something of a surprise from the Bank of England. At its meeting ending on 4 February, the Monetary Policy Committee voted 5–4 to maintain the Base Rate at 3.75%. Four members voted to reduce the Base Rate by 0.25 percentage points, to 3.5%. Not the unchanged verdict, but the fact that 4 policymakers again voted for a cut in interest rates. So a cut next month is now extremely likely.

Although the Bank’s Governor maintains a hawkish view on interest rates, he is likely to be swayed by the argument that inflation is gradually being brought under control, while the economy is struggling to find any meaningful growth, due in no small part to measures from Chancellor Rachel Reeves.

The pound has not been particularly reactive to the political shenanigans which continue to swirl around Westminster. Yesterday, it rallied to a high of 1.3704 and closed at 1.3695 as the odds on a rate cut in the U.S. increased.

Federal Reserve Governor Stephen Miran has resigned from his position as Chair of the White House’s Council of Economic Advisers, fulfilling a pledge he made to the Senate as his assignment at the Central Bank becomes longer-lasting.

Miran had been on unpaid leave from his CEA post since Donald Trump appointed him last year to fill an unexpected vacancy on the Fed’s Board of Governors for a term that expired on 31 January. The arrangement drew the ire of Democratic senators, who said it would make a presidential puppet of the Fed’s newest policymaker.

Those accusations will likely flare up again, as many Democrats will see Trump’s influence strengthened by this and his nomination of Kevin Warsh to replace Jerome Powell as Fed Chair.

Miran said his lawyer advised him there was no need to resign from his CEA post, as the Fed job was only for a few months.

Meanwhile, top academics have dismissed Kevin Warsh’s claim that an AI-induced productivity boom will create room for interest rate cuts, according to a snap FT economists’ poll that highlights the challenges facing Donald Trump’s pick for Federal Reserve chair.

Warsh, who Trump named as his nominee to replace Jay Powell at the end of January, has argued that AI will trigger “the most productivity-enhancing wave of our lifetimes — past, present and future” This will expand output and pave the way for the Fed to cut US borrowing costs from their current level of 3.5-3.75 percent without triggering a rise in prices, he says.

Close to 60% of the 45 economists polled by the University of Chicago’s Clark Centre for Global Markets this week said any impact on prices and borrowing costs over the next two years was likely to be negligible, lowering PCE inflation by less than 0.2 percent over the next two years.

Tomorrow, the Bureau of Labour Statistics will release its annual revision to total employment, along with the regular monthly jobs report. It’s estimated that the 2025 job count was overstated by about 863,000. If true, the U.S. economy lost jobs in 2025.

Last year, a similar revision shocked markets for a few days. This one could be way worse and hurt the Trump Administration’s narrative that this is the “best economy ever.”

Last week, we saw the job openings and labour turnover survey (JOLTS) continue its downward trend. When there are significant changes to immigration policy, there is a clear risk of increased job mismatches and, likely, an inflationary lift in employment costs.

The dollar index retreated yesterday as investors grew concerned about the labour market and the Fed being “forced” into cutting rates to support a weakening economy. The index fell to a low of 98.79 and closed at 98.85.

Canadian Prime Minister Mark Carney addressed a meeting of the EU’s finance Ministers recently and outlined a plan for NATO to both increase its spending on defence and move from “under the thumb” of U.S. defence contractors.

It is generally believed that one reason Trump insists that Europe pay a greater proportion of its GDP towards NATO’s budget is that this adds to the major defence contractors like Lockheed and Northrop Grumman’s cash flow.

What Carney is suggesting is that a “Defence Bank" is created, which European nations, including the UK, would subscribe to, which would have the advantage of giving contracts to whomever it chooses, potentially reducing the American “slice of the pie”. The inflow could be as much as $400 billion over ten years.

The beauty of the plan is that European nations will increase defence spending, as Trump has called for, while also increasing investment in their own defence sectors.

Italy has been the first Eurozone member to subscribe to this plan, with others expected to follow. It is expected that the share prices of Lockheed, Grumman, and others will begin to fall as the plan takes hold.

Trump will struggle to denounce the plan, since it achieves what he has demanded, but the funding will remain in Europe.

The European Central Bank's policy rate is at the right level as inflation is likely to settle at its 2% goal after a short-lived dip, ECB policymaker Joachim Nagel said yesterday.

The ECB unanimously kept its main interest rate unchanged at 2% last week, but some policymakers remain concerned that price growth or lack thereof, which eased to 1.7% last month, might weaken too much, forcing the Eurozone's Central Bank to react.

Nagel said the ECB would act only if its medium-term inflation expectations deviated "sustainably and noticeably" from its target, but this did not appear to be the case.

"Many factors suggest that the current interest rate level is appropriate," he said. "First, the inflation shortfall is short-term and small, and, in the medium term, inflation is at our target."

He added that long-term inflation expectations were "firmly anchored", and measures of core prices, which strip out volatile items such as energy and food, also supported this view, as did an update of the ECB's December projections.

Data published last week showed much of January's drop in inflation was due to lower energy costs, although services also saw a moderation in price increases.

"Small, temporary deviations, especially in volatile components such as energy prices, do not require a change of course if inflation expectations are firmly established," Nagel said.

He said this applied both when "the inflation target might be undershot" and when inflation risked running too high.

The Euro rallied to a high of 1.1946 yesterday as investors shied away from the dollar, as the Fed may be close to restarting its cycle of interest rate increases, while the ECB believes its next move will be a rate hike.

Have a great day!