26 May 2026: The Bank of England Governor says cuts have been ‘taken off the table’

UK retail sales recorded their steepest monthly drop in almost a year, a clear sign that consumers are tightening their belts again. The Office for National Statistics reported a 1.3% fall in retail sales volumes in April, the sharpest decline since May 2025 and more than double economists’ expectations.

Fuel sales fell 10.2%, the biggest drop since November 2020, as motorists cut back on journeys and delayed filling up amid soaring petrol and diesel prices. Petrol hit 158.52p per litre, up nearly 20% since the Middle East conflict pushed up crude oil prices.

Meanwhile, clothing sales fell 2.4%, with retailers blaming variable weather and increasingly price-sensitive shoppers.

The fall comes after a strong March, when many drivers stocked up on fuel amid escalating geopolitical tensions. April’s reversal shows consumers reacting to higher living costs, energy price pressures, and ongoing uncertainty about the conflict's longevity, which could flare up again at any time.

Despite the monthly drop, sales over the three months to April were still up 0.5%, thanks to stronger performance earlier in the quarter, particularly in beauty, computer, and tech retail.

Bank of England Governor Andrew Bailey has made it clear that interest-rate cuts are no longer on the table.

The Iranian conflict is lasting far longer than markets had expected, and even President Trump appears to have no control over when it will end. In testimony to MPs on the Treasury Select Committee, Bailey said the Bank had expected to cut rates “once or twice this year.” Still, the geopolitical shock has fundamentally altered the outlook.

Bailey told MPs that markets had been pricing in cuts, and the Bank itself had seen them as a reasonable expectation earlier in the year. However, the Iran conflict and the resulting energy-price shock have forced the Bank to remove those cuts from consideration.

By taking cuts “off the table,” the Bank has effectively tightened policy, even without raising rates.

He emphasised that the conflict is the “dominating change in the landscape” for the UK economy, keeping the cost of living higher and delaying inflation’s return to target.

According to Bailey, the energy shock is keeping inflation higher than it otherwise would be. He believes that inflation might already have reached 2% without the geopolitical disruption, and the Bank must now assess how long the conflict lasts and whether it has caused lasting damage to energy infrastructure.

Long-term unemployment in the UK has reached its highest level in a decade, prompting sharp criticism of Chancellor Rachel Reeves. Fresh ONS data shows 474,000 people have been out of work for more than a year, the worst level since January 2016.

Labour’s tax rises on employers, particularly the £26 billion National Insurance increase in Reeves’s first Budget, are being blamed for cooling hiring and raising business costs.

Successive minimum-wage hikes and new Employment Rights Act protections have further increased labour costs, making firms more cautious about taking on staff. Job vacancies have fallen to a five-year low, meaning more people are chasing fewer roles.

Economists warn that this combination has raised the structural, not just the cyclical, rate of unemployment.

Amazon UK’s country manager, John Boumphrey, says young people should not be blamed for the lack of job opportunities — the fault lies with the system, not the generation. In a BBC interview, Boumphrey rejected the narrative that Gen Z lacks motivation or resilience, arguing that employers are misdiagnosing the problem.

The pound broke out of its recent range yesterday in thin, holiday-dominated markets. It rallied to a high of 1.3509 and closed at 1.3502. This ended a run of multiple sessions in which traders and investors appeared to have little consensus on the currency’s medium- to long-term direction.

Donald Trump is publicly downplaying the economic pain many Americans say they are feeling, dismissing negative data and insisting that the economy is strong despite rising costs. In a Fox News interview, he said polls showing Americans struggling financially are “fake” and part of a partisan effort to make the economy look weak.

He argues the U.S. economy is “the strongest it’s ever been” and insists that “costs are way down,” pointing to gasoline and energy prices. He also calls negative economic coverage a “con job by the Democrats” and claims media outlets are repeating a coordinated narrative.

Trump also claimed petrol prices are falling sharply and could soon hit $2 per gallon, even though transport groups' data at the time showed the national average at $3.07, almost unchanged from a year earlier.

Kevin Warsh was officially sworn in as Chairman of the Federal Reserve on Friday. Trump and Kevin Warsh are now politically and economically intertwined; their fortunes will rise or fall together. Fresh reporting shows that by appointing Warsh as Federal Reserve Chair, Trump has effectively taken ownership of U.S. monetary policy.

This contrasts with Jerome Powell, whom Trump routinely blamed for high rates and slow growth. Warsh is Trump’s pick, for better or worse.

With Powell gone, Trump no longer has a convenient scapegoat for economic frustrations such as high mortgage rates, sticky inflation, and weak consumer sentiment.

Trump’s approval rating on the economy has fallen sharply, including among independents and even Republicans, raising the stakes for Warsh’s early decisions.

Inflation has accelerated from 2.3% to 3.5% since March 2025, and petrol prices have surged to $4.55 per gallon after Trump attacked Iran and the pressures that voters directly feel.

In short: if Warsh fails to tame inflation or revive confidence, voters will blame Trump.

Fed Governor Christopher Waller is openly preparing to axe the easing bias, a major hawkish shift signalling that rate cuts are no longer the default next step. Across multiple speeches last week, Waller made clear that the Federal Reserve should remove any language implying that cuts are more likely than hikes, given that inflation is stuck at 3.8% and broadening across the economy.

Before Kevin Warsh’s elevation, Waller was a member of an elite club of FOMC members who almost slavishly called for rates to fall to pander to the President’s desires.

Waller argued that inflation is “not headed in the right direction” and that the Fed should remove the easing bias to make clear that a rate cut is no more likely than a rate increase.

“The next move could be either a hike or a cut, entirely dependent on incoming data, but with inflation broadening across goods and services, it is 'crazy' to talk about rate cuts in the near future.”

It will be interesting to note the attention given to the release of personal consumption expenditures now that Warsh is in the “hot seat”. Under Jerome Powell, it was the Fed’s “most reliable” measure of inflation. The latest data will be published later this week, with economists expecting expenditures to rise moderately.

The dollar index is reacting almost solely to changes in risk appetite. With rising optimism that the conflict in Iran may end soon, despite Iranian denials, the index fell to a low of 98.92 yesterday and closed at 98.97.

Isabel Schnabel has said the ECB’s key interest rate is “in a good place”, meaning she sees no need to change policy unless a major new shock hits the eurozone. She made these remarks to investors, arguing that the current 2% policy rate is appropriate given inflation close to target and an economy showing signs of resilience.

She believes the ECB should consider moving rates only if a “big shock” materially alters the inflation outlook. She sees upside risks to inflation, not downside ones, meaning she is more concerned about prices rising too fast than falling too low.

Since the eurozone economy is recovering and its output gap is closing, it is not exerting disinflationary pressure. These comments are consistent with her broader stance: Schnabel has often been one of the more hawkish voices on the Governing Council.

In recent years, Schnabel has often argued for higher borrowing costs than some of her colleagues on the ECB’s Governing Council.

Some policymakers see a risk that weak economic growth could lead to a prolonged period of stagflation, with price increases below the 2% target. Still, Schnabel said there is a greater likelihood that prices will rise more quickly.

“Risks are tilted a little bit to the upside,” she said.

Overall, at the next policy meeting, the Eurozone inflation outlook is likely to be revised upwards, mainly because the Middle East conflict has pushed energy prices higher and added fresh uncertainty to the ECB’s baseline projections.

The ECB’s own March 2026 macroeconomic projections explicitly warn that spikes in oil and gas prices caused by the war in the Middle East will push inflation higher, increasing the likelihood that future forecasts will be revised upwards.

Several factors in the ECB’s latest published outlook point to higher inflation estimates: The ECB notes that the war in the Middle East has caused sharp increases in oil and gas prices, which will feed directly into headline inflation.

The ECB states that inflation will be higher in the short term than previously expected, even though it still projects a return to target in 2027–28 if energy prices fall back in line with market expectations.

The Central Bank emphasises that the inflation outlook is surrounded by “high uncertainty”, largely due to geopolitical risks, signalling that revisions are more likely than usual.

Taken together, these elements strongly suggest that the next round of ECB staff projections, to be published next month, will show higher inflation forecasts, especially for 2026–27.

Meanwhile, ECB President Christine Lagarde has pushed back against the idea of granting EU‑level exemptions or special fiscal carve‑outs to shield countries from the current energy shock, arguing that such measures risk undermining the ECB’s inflation‑control strategy.

Her recent speeches emphasise that while governments may want to cushion households and firms, broad exemptions or ad‑hoc fiscal responses can distort price signals, fuel demand, and ultimately make inflation harder to contain.

The Euro is also reacting to changes in risk appetite, but in an opposite direction to the dollar index. Yesterday, it gapped higher versus the dollar, reaching a high of 1.1652 and closing at 1.1642.

When a currency “gaps” on daily charts, it opens significantly higher or lower than its previous close. It is a market “truism” that the gaps are generally closed at the earliest opportunity.

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