13 February 2026: Budget uncertainty weighed on businesses and consumers in Q4

Bank of England policymaker Sarah Breeden said it is “reasonable to expect” a further quarter-point cut in interest rates by the end of April.

Speaking in Manchester, the Bank of England’s Deputy Governor for Financial Stability said it was time to “take the foot off the monetary brake” and provide more support to the economy by lowering borrowing costs.

Earlier this month, the BoE held rates at 3.75% in a closely contested vote. The Monetary Policy Committee split 5-4 in favour of the decision, with Governor Andrew Bailey casting the deciding vote. Breeden was one of the four members to call for a cut. She told reporters that she was more focused on the downside risks of slow growth and rising unemployment.

“I wasn’t confident that we’re going to see much pickup in activity, so I thought it was appropriate for us to take our foot off the monetary brake a little bit and provide a bit more support for the economy,” she said.

“If we continue to see the economy develop as we expected and if there are no shocks, to be clear, those are two big ifs, I think it’s reasonable to expect there to be a cut over the next couple of meetings.”

The BoE’s next decisions are on March 19 and April 30. Inflation remains above target at 3.4%, but the Bank expects it to fall to around the 2% target level in April and stay there. Bailey signalled in the minutes to the MPC decision that, like Breeden, he “is aligned with the staff’s view of weaker demand.”

The economy grew a meagre 0.1% in the fourth quarter, according to preliminary figures from the Office for National Statistics published yesterday.

Economists polled by Reuters expected the economy to grow 0.2% in the October-December period, following 0.1% growth in the third quarter.

Month-on-month, the economy expanded 0.1% in December, down from a 0.2% expansion, revised down from 0.3%, the previous month.

The ONS’ Director of Economic Statistics, Liz McKeown, said the latest data showed a mixed economic picture.

“The often-dominant services sector showed no growth, with the main driver instead coming from manufacturing. Construction, meanwhile, registered its worst performance in more than four years,” she commented on social media.

The U.K. economy is estimated to have grown 1.3% in 2025, the ONS noted, following a 1.1% increase in 2024.

Inflation pressures are expected to ease in the coming months, and economists agree with Breedon in predicting that the Central Bank may cut rates again in April to stimulate the lacklustre economy.

The pound attempted to rally as the dollar lost ground, reaching a high of 1.3671, but traders lacked any commitment to driving it higher, and it drifted back to close virtually unchanged at 1.3621.

The country's unemployment rate stood at just 4.3% in January, according to official figures published on Wednesday, but hiring stalled across many sectors. Since Donald Trump returned to office, monthly job creation has dropped to levels not seen since the 2008 financial crisis.

The US economy is doing well, except for those who keep it running; American employees are not fully benefiting from this good fortune. Labour market figures released on Wednesday by the Bureau of Labour Statistics initially appeared positive, with a net gain of 130,000 jobs in January, a rebound that far exceeded forecasts, and a steady unemployment rate at 4.3% (down from 4.4% in December).

However, the report also included far more troubling data: Previous years' figures have been significantly revised downward. Since Donald Trump's return, only 180,000 jobs have been created, or 15,000 per month, the slowest pace since the recession years following the 2008 financial crisis or the Covid-19 pandemic. In other words, while the US economy posted remarkable growth, it did so with few, if any, new jobs.

Will this be a long-term trend driven in no small part by the growth of AI?

Trump, unsurprisingly, focused on the positive part of the report, "Great jobs numbers, far better than expected!" "The United States of America should be paying significantly less on its borrowings," he immediately added, claiming that the country would be in budgetary balance with lower rates, which is false.

Kevin Warsh has spent much of the last 15 years criticising the Federal Reserve for getting too big, mismanaging inflation and compromising its independence.

So, as President Trump’s pick to succeed Jerome Powell as chair of the Fed, what does he do about it? He faces three key tests. First, significantly shrink the Fed’s balance sheet without upsetting markets. Second, push inflation down to 2% and keep it there. Third, do this without Trump's meddling, which compromises the Fed’s independence.

All will be tougher than they look.

Shrinking the balance sheet has the FOMC's overall support and is underway, albeit at a slower pace than Warsh would like. Second, lowering inflation to 2%. This will be more difficult and likely to put him in conflict with both Trump and the Treasury Secretary.

Keeping inflation at 2% will be by far the most difficult of Warsh’s tasks, as he will contend with FOMC members, many of whom want to see inflation remain at 2% but face a President who takes no notice of “economic mechanics”, since that will take, at least, maintaining interest rates at close to their current level.

Senate Minority Leader Chuck Schumer and Senate Banking Committee ranking member Elizabeth Warren have sent a letter to Warsh, pressing him on whether he has signed a loyalty pledge to President Trump.

"We seek to understand the extent to which President Trump, who has stated that 'anybody that disagrees with me will never be the Fed Chairman' and bemoaned potential 'disloyalty' amongst appointees, demanded, either implicitly or explicitly, that you do his bidding as a condition of your appointment," the senators wrote in the letter.

They also asked Warsh to confirm or deny reporting that Trump asked if he could trust Warsh to lower interest rates if appointed as Fed chair. So far, there has been no public response from Warsh.

Such a pledge would obviously run contrary to the Fed’s independence, which is enshrined in the Constitution.

The financial markets are currently drifting in the absence of any consequential statements that would drive the dollar index outside its recent range. Investors and traders believe they have a “pretty decent” handle on the G7 central banks’ monetary policy intentions. At the same time, being prepared to wait until Kevin Warsh takes over at the Fed, Jerome Powell decides if he is staying on as a Governor, and how much influence Stephen Miran will be able to exert as Trump’s “man at the Fed”.

The dollar index reached just above the 97.00 level yesterday in thin trading but fell back to close marginally lower at 96.97.

Eurozone pay growth is set to quicken in the second half of the year, supporting the ECB’s view that interest rates can remain steady.

The Central Bank’s wage tracker, published on Wednesday, predicts salaries will rise by an annual 2.7% in the first quarter after advancing 2.6% in the fourth quarter of last year. While far below the peak of more than 5% early in 2025, that’s stronger than the projection for the first six months of this year.

“The rise in the wage path over the course of the year is related to the dissipation of the mechanical downward effect of large one-off payments that were made in 2024 but not in 2025,” the ECB said in a statement. “These mechanical effects are expected to disappear over the course of 2026 virtually.”

Officials' confidence that inflation will stabilise at 2% hinges on slower wage growth cooling price pressures in the labour-intensive services sector. President Christine Lagarde has said she’s “very attentive” to salaries among lingering uncertainties.

The ECB, which has kept interest rates steady since last June, identifies wages as a potential upside risk to inflation because they influence the services component.

For households, 2025 marked another year of regaining purchasing power. Real wages in the eurozone grew by an average of 2.6%.

Differences were large, however. Countries with above-average wage growth were Italy, the Netherlands, and Germany, and, most notably, Spain, while Belgium and France saw much slower growth in real wages.

Throughout 2025, wage growth gradually slowed, while unemployment remained at historically low levels. Looking ahead to the next year, expect unemployment to remain low, with nominal wage growth continuing to outpace inflation.

Consumer prices are expected to rise slightly less than this year, just under 2%. Continuing Euro strength, competition from Chinese imports, and, most importantly, cheaper energy will all contribute to growth in purchasing power over the next year. However, the growth in real wages will slow this year.

Should inflation undershoot, real wages would benefit.

ECB President Christine Lagarde has called on EU leaders to take swift action across several critical areas to bolster the bloc’s resilience amidst global uncertainty. According to Reuters, this includes potentially controversial joint debt issuance. Lagarde aims to invigorate a hesitant reform process at this week’s EU summit, as the bloc faces pressure from unpredictable U.S. policy and China’s growing influence in export markets.

Following Lagarde’s announcement last week about sending EU leaders a “checklist” of necessary reforms, the ECB has prepared a document outlining key priorities.

These include establishing a savings and investment union, realising the digital euro, deepening the single market, fostering innovation, and strengthening the core institutional framework.

The ECB argues that coordinated and decisive collective action can unlock higher growth potential, strengthen resilience, and reinforce policy autonomy and prosperity for Europe, requiring increased productivity, mobilised investment, and enhanced resilience.

The summit will be a “typical” Eurozone affair, with much talk of commitment to change. Still, at the end of the day, high-ranking EU and Eurozone officials are too comfortable in their positions to commit to the real change necessary to create a more united bloc.

The euro was also becalmed yesterday, trading between 1.1890 and 1.1852 and closing barely changed at 1.1869.

Have a great day!