1 October 2026: Bailey calls for more testing of AI before greater regulation

The economy grew more quickly than previously thought in the second quarter, consolidating its position as the fastest-growing Group of Seven economy in the first half of 2026, ahead of Chancellor John Healey presenting his first budget later this month.

Economic output expanded by 0.5% in the April-to-June period, the Office for National Statistics said yesterday.

The reading was slightly stronger than a previously published flash estimate of 0.4%. Economists polled by Reuters had expected the 0.4% rise to be confirmed.

The data showed Britain's gross domestic product rose 1.4% YoY in the second quarter, up from an initial 1.2% estimate.

The figures underlined Britain's surprising resilience amid geopolitical upheaval and an ongoing global bond market crisis, with consumer confidence continuing to improve.

The data pointed to strength across the economy, with output rising in the manufacturing, construction and dominant services sectors.

The ONS also revised second-quarter business investment growth up to an annual rate of 5.2%, from an initial estimate of 0.8%.

The figures are a boost for Prime Minister Andy Burnham's government as it seeks to spur growth.

Burnham, speaking at the Labour Party's annual conference on Tuesday, said his plan to increase public control of key services could help bolster the economy.

Britain's economy remains the fastest-growing in the G7 despite higher energy prices caused by the Iran war and rising borrowing costs.

The upward revision to real GDP growth in Q2 suggests the economy was somewhat more resilient to higher energy prices in the first half of the year than previously thought.

This resilience may continue into Q3, but expect it to fade in Q4 as higher inflation takes a bigger bite out of households' real incomes.

Andy Burnham has said it will be a "tough winter" as the cost of living continues to put pressure on families and businesses.

Asked how he can give his promised "breathing space" to the public amid global pressure, Burnham said: "It's going to be a tough winter, there's no doubt about that. And that's why I think about what I can do, what is under my control, to help people.

It's not just the cost of living; it's the cost of running a business. And we're looking at those issues as we head towards the budget."

Asked whether he was saying his message is to dig in and that he will do what he can, the PM said: "It's about trying, isn't it? Trying your best to help people in any way I can."

But alluding to Liz Truss’ mini-budget, he went on to say that he will not put forward "unfunded budget proposals" that "created even bigger problems for the country". He reiterated his commitment to the fiscal rules.

Governments should not rush to regulate artificial intelligence, the Bank of England governor has said.

Andrew Bailey, who holds the key oversight role in UK finance, stressed the need for “rigorous model testing, conducted before, during and after deployment” before any tighter regulation.

He recognised the potential benefits of Frontier AI were “immense” but that it needed “rigorous testing” to better understand its “increasingly complex behaviour”.

But experts have warned that AI used in strikes in Gaza and Iran already demonstrates its risks to humanity and that it should be regulated.

Sterling softened modestly against most majors yesterday, with moves generally small and driven by broader dollar strength rather than UK‑specific news.

Minneapolis Federal Reserve President Neel Kashkari has said price pressures remain elevated following the latest batch of inflation data released yesterday.

Kashkari’s comments come after the Fed’s preferred inflation measure, the personal consumption expenditures price index, rose by 3.4% over the past 12 months in August. Despite revisions to PCE that lowered the YoY trend, economists project the Central Bank will largely remain committed to achieving price stability on time.

Speaking at an event in New York, Kashkari said the bigger surprise in the data was the revisions to gross domestic product growth, which suggested a resilient economy and consumers.

“I didn’t think the inflation data today really changed that story for me very much,” Kashkari said.

In the Fed’s September Summary of Economic Projections, Kashkari said he pencilled in two rate increases this year, one of which already occurred at this month’s meeting.

However, he said that was a snapshot in time based on the data available then.

“Including the GDP revisions that we’ve now seen, including the consumer spending data, all of this needs to go into my real-time assessment of where we go from here,” Kashkari said.

Meanwhile, New York Fed President and Deputy Chairman John Williams has told reporters that policymakers probably only need to deliver one rate hike this year to get inflation back on track to the US Fed’s 2% goal.

“With the policy action we took at our September meeting, there is no need for urgency,” Williams said at the University at Buffalo in Buffalo, New York. “Watching incoming data before deciding what's next should provide greater clarity on how the economy is performing,” Williams said.

His comments illustrate a growing rift regarding the future path of inflation at the Federal Open Market Committee. However, the differences are not major and show that data dependency is the confirmed method of judging the effect of the energy shocks facing G7 economies.

Kashkari is a voting member of the FOMC this year, while Williams is a permanent voter.

On another front, Fed Governor Lisa Cook expects continued inflationary pressure from the build-out of artificial intelligence in the coming months.

Speaking at an event in Oakland, California, Cook said steep price increases in goods such as chips, computers and software reflect a shift in demand towards AI-related sectors, rather than an increase in economy-wide demand.

As supply chains adjust and efficiency gains accrue, those price pressures should resolve on their own without policy intervention, Cook said. “Addressing relative price shifts is not our role,” according to a text of her remarks.

However, Cook said she sees economy-wide pressure from AI-fuelled demand, as data-centre investment relies on inputs like construction labour and energy, which are broadly used in the economy, and could see shortages of both labour and goods.

“AI investment could introduce price pressure to those other sectors,” Cook said.

As policymakers try to gauge if and when AI will deliver any disinflationary payoff, Cook said the timing will depend on how quickly and broadly businesses adopt AI tools, and how fast any productivity gains pass through to the labour market.

“While I expect that productivity growth may modestly ease those inflationary pressures, the labour market will be at risk of entering a painful transition,” Cook said.

Tomorrow’s release of August labour market data is unlikely to show any AI-inspired job creation, although the construction sector may see a minimal upswing.

The US dollar strengthened yesterday across most major FX pairs, supported by firm rate‑hike expectations and resilient US data, before paring gains late in the session after dovish‑leaning comments from the Fed’s Williams.

European Central Bank Governing Council member Isabel Schnabel said yesterday that higher costs are being passed through to consumers more quickly because the economy is resilient.

Schnabel added that the economy may respond more to the recent spike in global yields, which “would dampen price pressures.” This would return inflation to target more gradually, she added.

The ECB should closely study a trio of domestic and global factors that could either boost or ease price pressures to decide whether more interest rate hikes are needed.

Schnabel, an outspoken policy hawk, will leave her ECB role in January to take up a position at the IMF. She did not make her preferred policy path clear; she outlined the factors that could make or break the case for further policy action.

The first factor is whether a more persistent rise in energy prices would affect inflation expectations, especially after a long post-pandemic period of high inflation. While repeated episodes of high inflation make prices more salient and could prompt households to raise their own price or wage expectations, most measures of longer-term inflation remain around 2%, partly because of the ECB's own hikes.

"As long as expectations are firmly anchored and backed up by a track record of delivering on the inflation target, monetary policy can tolerate a more gradual return of inflation to target," she said in a speech in Luxembourg.

A second factor is whether overall demand in the economy will remain resilient, since higher costs pass through to consumers more easily when growth holds up.

A third item to watch is how the recent surge in global borrowing costs, driven in part by rising US yields, impacts the economy, Schnabel said. Some models suggest this could weigh on growth more than the ECB has predicted. "It is therefore possible that the economy will respond more to the recent tightening than currently assumed. This would dampen medium-term inflationary pressures compared with the baseline projection," she said.

Still, robust credit dynamics suggest that interest rates still do not restrict the economy, and she said it was also possible that "restrictive" territory was now higher than earlier thought.

Despite Schnable’s marginally less hawkish comments, the annualised inflation rate in Germany, Europe's biggest economy, reached 3.3% in September, the fastest pace since December 2023, according to preliminary data from the statistics agency Destatis.

In France, consumer prices rose 3% YoY in September, the highest since February 2024 and a sharp increase from 2.4% in August, the statistics office Insee said.

In Italy, inflation jumped to 4.2%, nearly a full percentage point above the 3.3% recorded in August, its Istat agency reported.

Diesel prices in particular have hit record highs in Germany, France, Italy and several other eurozone countries in recent weeks, driven by the war in the Middle East, which has slowed shipments of both crude oil and refined fuels from the Gulf as the Strait of Hormuz remains effectively closed.

That has raised expectations among analysts that the ECB will tighten monetary policy further in the coming months to rein in inflation, potentially dampening the eurozone's economic growth.

The Central Bank raised its benchmark rate to 2.5% earlier this month, its second increase this year.

Inflation data for the full eurozone will be released tomorrow.

The Euro weakened slightly in FX markets yesterday, posting small declines against the US dollar, Sterling, and several Central/Eastern European currencies, while posting modest gains against Scandinavian and commodity‑linked currencies.

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