24 February 2026: The UK is proceeding towards inflation normalisation at a reasonable pace

Monetary Policy Committee member Professor Alan Taylor makes few public appearances, but when he does, he is worth listening to. Taylor is considered by far the most dovish member of the rate-setting committee, having consistently voted to cut rates during his 18-month tenure. He even took the unusual step of voting for a “jumbo” fifty-point cut a year ago. However, his colleagues eventually agreed to a less reactionary twenty-five-point cut.

He believes that we are seeing weaker forecasts for the output gap and unemployment, while the services CPI has not fallen as quickly or as far as hoped, which has been slightly concerning in recent months. He is looking for service price inflation to normalise alongside wage growth this year.

“I have become more reassured that we are proceeding towards inflation normalisation at a reasonable pace, although weaker than expected productivity growth could be a risk to the outlook, and the jobs forecasts are converging on a pessimistic outlook. Risks are shifting to lower inflation, but higher unemployment.

“We might have 2-3 rate cuts to go before the theoretical neutral level”, although he agrees that his idea of that level is lower than several of his colleagues.

Moving on, Taylor also believes that high U.S. import tariffs appear to be here to stay, and their full impact represents a meaningful change which is likely to take "many years" to be felt. "I think the fundamental thing to realise is those tariffs are here to stay at some kind of number that is a lot, an order of magnitude bigger than it was two years ago," Taylor said at an event organised by Deutsche Bank.

"So I think we should expect this shock to play out over many years," he added.

Taylor said there were signs that China was diverting exports to other parts of East Asia and to the European Union, with potential deflationary consequences. Still, it was hard to know how significant the impact would be.

He said he would be concerned about underlying inflation pressures if they came in higher than expected "over and over" again. Still, he was not worried about January data in isolation, which showed faster-than-expected services price growth.

The risk to the BoE's forecasts was shifting towards lower inflation and more serious economic damage from unemployment, Taylor concluded.

New data suggests that Britain's labour market has deteriorated sharply, with job vacancies plunging to 694,000, a five-year low not witnessed since the depths of the pandemic.

Unemployment has climbed to 5.2%, the highest rate in four years, according to the latest figures from the Office for National Statistics.

The squeeze on opportunities means jobseekers now face significantly tougher competition, with more than two candidates chasing every available position, with some businesses aiming at Chancellor Rachel Reeves's tax decisions.

Research from jobs platform Adzuna revealed that advertised roles dipped below the 700,000 threshold for the first time since January 2021.

Last year, the Chancellor raised the National Living Wage for workers and employers' National Insurance contributions.

The pound began the day strongly yesterday as traders were concerned about any further reaction to the U.S. Supreme Court's decision to declare his tariff plans, announced last April, illegal. Having already declared a 10% global tariff on all imports to the U.S., then raising it to 15%, the market was relieved that he appeared to move on, as he is wont to do, and made no further trade statements.

Sterling reached a high of 1.3535 during the morning, before falling back to close barely changed at 1.3492.

The underlying level of inflation heated up in December as measured by a New York Federal Reserve gauge, suggesting further challenges in getting overall price pressures back to the Central Bank's 2% target.

The Regional Fed said its Multivariate Core Trend inflation reading ticked up to 2.8% in December from 2.4% in the prior month, boosted by price pressures in services outside housing and in goods.

Fed officials expect price pressures to retreat this year as President Trump's system of large-scale increases in import tariffs, which are still open to revision, exerts a less dramatic impact on inflation.

Much of the overshoot of the Central Bank's inflation target has been attributed to Trump's tariffs, and concerns about price pressures have led several Fed officials to oppose interest rate cuts even as the job market has softened.

In an appearance on Friday in New York, Dallas Fed President Lorie Logan, who was sceptical of the rate cuts delivered last year given the persistence of inflation over the target, said she was "cautiously optimistic" that, given where monetary policy is now set, "we're on a path for inflation to come back down toward our target."

"I expect that some of the tariff effects, particularly in goods inflation, will start to fade," as a "roughly balanced" job market helps other parts of inflation cool, Logan said.

She noted that the Trimmed Mean Personal Consumption Expenditures rate, another alternative inflation measure produced by the Dallas Fed, is moving in a more favourable direction.

It appears that several regional Federal Reserves have taken to publishing their own “workings” on inflation to justify their Presidents’ FOMC votes. Logan has become a voting member of the 2026 class for the first time.

Should this persist, it will give the market far greater insight into the state of regional economies and allow it to make better judgment calls about how monetary policy decisions are made, doing away with an individual member’s hawkish or dovish attitude.

Fed Governor Christopher Waller, a one-time candidate for the Fed Chairmanship, said yesterday that solid job gains in January could mean the Central Bank can skip a rate cut at its next meeting in March, a decision that would likely spur further attacks by President Donald Trump.

At the same time, Waller said last month's pickup in hiring, when employers added a more-than-expected 130,000 jobs, could have been a one-time gain. He said he would need to see a similarly positive report next month to conclude that the job market, which he noted was very weak in 2025, is improving.

Waller's hedging is a notable shift from January, when he was one of the two Fed governors to dissent against the Central Bank's decision to hold its key rate steady after three rate cuts at the end of last year. The decision left the Fed's short-term rate at about 3.6%. It may be that since his bid for the Chair has failed, he has decided that he may as well “vote his conscience”

The dollar index had a fairly meek reaction to the Supreme Court judgment regarding the legality of Trump's trade “initiative”. It initially fell to 97.35 but ran into strong buying interest, possibly due to Waller’s more hawkish stance, and closed at 97.74.

The latest PMI data reveals a significant recovery across the Euro area, supporting projections for moderate but sustained economic growth throughout 2026. Commerzbank economists highlight this encouraging trend as manufacturing and service sector indicators show consistent improvement.

This development follows several quarters of economic uncertainty and suggests a stabilising European economic landscape.

Purchasing Managers’ Index surveys provide crucial forward-looking indicators of economic health. These surveys measure business conditions across manufacturing and service sectors. The recent recovery in Euro area PMIs indicates expanding business activity. Specifically, the composite PMI reading has climbed above the critical 50-point threshold. Readings above 50 signal economic expansion, while readings below 50 indicate contraction.

Commerzbank’s analysis identifies several contributing factors to this recovery.

Firstly, easing supply chain pressures has supported manufacturing output. Secondly, resilient consumer demand in core European markets has sustained service sector growth. Thirdly, improved business confidence has encouraged investment decisions.

Consequently, the overall economic momentum appears more balanced than in previous years.

The Q1 2026 pickup suggests the Eurozone entered the year with modest but improving momentum, especially in manufacturing. However, the broader 2026 outlook remains subdued, with growth expected to stay below historical norms due to weak external demand and cautious consumers.

Confidence among German businesses picked up in February as the rollout of government stimulus gathered steam, though renewed tariff uncertainty could yet undermine the outlook.

The Munich-based Ifo Institute reported yesterday that its business-climate index, based on around 9,000 monthly responses from businesses, rose to 88.6 in the month, up from 87.6 in January. This is the highest reading since August.

A consensus of economists polled by The Wall Street Journal had expected a smaller uptick to 88.1.

“The German economy is showing the first signs of recovery,” said Clemens Fuest, President of the Institute.

Sentiment is being buoyed by government investment. Early last year, the German government pledged up to around a trillion Euros for infrastructure and defence. Initial uncertainty over the timing of this spending weighed on confidence, but funds are now beginning to flow to key sectors.

Business confidence in both the current climate and future expectations rose in February, with the sentiment uptick widespread across the manufacturing and services sectors.

The Ifo survey adds to German PMI data, published Friday, which showed business activity picking up across both sectors this month.

“We are seeing increasingly clear signs that the economy is picking up momentum. We stand by our forecast that the German economy is likely to grow more strongly this year than is generally expected,” said Robin Winkler, chief economist for Germany at Deutsche Bank.

The upswing in February should also reflect relief after President Trump backed down from threats to impose extra tariffs on several European countries, including Germany, for failing to agree to a deal for the U.S. to acquire Greenland, which weighed on sentiment last month.

German Chancellor Friedrich Merz has had something of a rocky start to his leadership of the Eurozone’s largest economy. Still, his pledge to divert part of the country’s large fiscal surplus into infrastructure projects and to rearm Germany’s military is beginning to take hold.

The Euro currently has very little to provide significant impetus in either direction. Yesterday, it traded between 1.1884 and 1.1774, closing marginally weaker at 1.1789.

Have a great day!