19 February 2026: A rate cut next month is now heavily favoured

Yesterday’s publication of inflation data spiked the guns of members of the Bank of England’s Monetary Policy Committee, who have consistently voted to keep rates unchanged. Inflation fell to its lowest level in almost a year, with food and fuel prices the main drivers of the CPI's decline to 3%.

The latest inflation numbers underline that the Bank of England has little excuse not to cut interest rates in March, and investors should start preparing now.

Headline price pressures have clearly lost momentum, supported by lower transport, food and energy costs, while core and services inflation have also softened. The next scheduled Bank rate decision by the Bank of England’s Monetary Policy Committee is on 19 March, when policymakers will assess incoming data before deciding whether to trim the official base rate from its current 3.75% level.

According to ONS Chief Economist Grant Fitzner, the figures represent a "marked" shift in the economic landscape. While the cost of bread, cereals, and meat has dipped, these benefits were partially offset by rising costs in the hospitality sector, specifically hotel stays and takeaways. However, the overarching trend is undeniably positive.

Chancellor Rachel Reeves seized on the news, framing it as a vindication of the government's fiscal strategy. "Cutting the cost of living is my number one priority," Reeves declared, highlighting the freeze in rail fares and energy bill support as key pillars of their success.

Reeves appears to have a new number one priority every week! When the GDP numbers were published recently, she proclaimed that economic growth was her number one priority.

However, economists warn that while the rate of inflation is falling, prices are still rising, just at a slower pace. The target remains the Bank of England's mandated 2%, a goal that now feels within touching distance.

The Bank’s Chief Economist, Huw Pill, makes a valid point when he recently said that falls in inflation are being driven by “one-offs,” while the underlying trend is for inflation to remain above the Bank’s 2% target. This appears to be the reason in December as well, and we may see the MPC Hawks still want to proceed with caution. The January inflation data will be released on the cusp of the next meeting.

Labour ministers are weighing whether to abandon a flagship election pledge to standardise minimum wage rates across adult age groups, as youth unemployment climbs to its highest level in more than a decade.

Concerns are growing within Labour about the policy's potentially detrimental economic impact.

Figures from the Office for National Statistics (ONS) show that 16.1% of those aged 16 to 24 are now unemployed, placing Britain above the EU average and marking a significant shift in the labour market for younger workers.

A reversal would represent the Government’s 16th policy U-turn since Sir Keir Starmer entered Downing Street 18 months ago, underlining mounting pressure on ministers over economic strategy and labour‑market reforms.

Political risk in the UK remains elevated. It would be astonishing if it doesn’t become a significant headline issue again this year, probably more than once. There’s a big by-election at the end of February, and then the local elections in May.

Political turbulence is not necessarily a problem for markets or the economy. The real issue is the potential for a shake-up in the decision-makers. It is by now widely and convincingly argued that if Keir Starmer is pushed out as Prime Minister, then his replacement is likely to be more left-wing than he is. If he stays, the price of staying will be a swing further to the left.

There remains a “risk premium” on Sterling that has been around for almost ten years, since the Brexit vote. The change of Government was supposed to remove that. Still, so far nothing has changed, merely the inference, although the present Government cosying up to Brussels would come as no surprise to several observers.

Yesterday, the pound lost ground as traders and investors adjusted their bets on a March rate cut. It fell to a low of 1.3495 and closed at 1.3499.

Federal Reserve officials were unable to agree on the immediate path for interest rates at their January meeting, indicating that further interest rate cuts should be paused for now and could resume later in the year only if inflation cooperates.

While the decision to hold the Central Bank’s benchmark rate steady was mostly met with approval, the path ahead appeared less certain, with members conflicted between fighting inflation and supporting the labour market, according to minutes released yesterday from the Jan. 27-28 Federal Open Market Committee meeting.

“In considering the outlook for monetary policy, several participants commented that further downward adjustments to the target range for the federal funds rate would likely be appropriate if inflation were to decline in line with their expectations,” the meeting summary said.

However, meeting participants disagreed on where policy should head, with officials debating over whether the focus should be more on fighting inflation or supporting the labour market.

“In considering the outlook for monetary policy, several participants commented that further downward adjustments to the target range for the Federal Funds rate would likely be appropriate if inflation were to decline in line with their expectations,” the meeting summary said.

However, meeting participants disagreed on where policy should head, with officials debating over whether the focus should be more on fighting inflation or supporting the labour market.

“Some participants commented that it would likely be appropriate to hold the policy rate steady for some time as the Committee carefully assesses incoming data, and a number of these participants judged that additional policy easing may not be warranted until there was a clear indication that the progress of disinflation was firmly back on track,” the minutes said.

Moreover, some even entertained the notion that rate hikes could be on the table and wanted the post-meeting statement to more closely reflect “a two-sided description of the Committee’s future interest rate decisions.“

Such a description would have reflected “the possibility that upward adjustments to the target range for the federal funds rate could be appropriate if inflation remains at above-target levels.“

The Fed reduced its benchmark borrowing rate by three-quarters of a percentage point in consecutive cuts in September, October and December. Those moves put the key rate in a range between 3.5%-3.75%.

The meeting was the first for a new voting cast of regional presidents, at least two of whom, Lorie Logan of Dallas and Beth Hammack of Cleveland, have publicly said they think the Fed should be on hold indefinitely.

Both have said they see inflation as a continuing threat and should be the focus of policy now. All 19 governors and regional presidents participate in the meeting, but only 12 vote.

Kevin Hassett, a top economic adviser to President Donald Trump, assailed a study from the Federal Reserve Bank of New York finding that U.S. companies shoulder most of the costs of tariffs, calling for the Central Bank to punish the researchers behind the work, which he characterised as an “embarrassment.”

Hassett was the other “Kevin” under consideration for Trump's nomination to be the next Fed Chairman.

“What they’ve done is they put out a conclusion, which has created a lot of news, that’s highly partisan, based on analysis that wouldn’t be accepted in a first-year economics class,” Hassett, who heads the White House’s National Economic Council, said on CNBC.

The comments represent the latest attack on the Federal Reserve from an administration that has repeatedly sought to bully the Central Bank, with the President himself repeatedly attacking Fed Chair Jerome H. Powell for not slashing interest rates.

A New York Fed spokeswoman declined to comment on Hassett’s remarks.

In the study published last week, the New York Fed found that U.S. companies and consumers absorbed nearly 90% of the economic burden of tariffs in 2025.

“Our results show that the bulk of the tariff incidence continues to fall on U.S. firms and consumers,” the New York Fed officials wrote. “These findings are consistent with two other studies that report high pass-through of tariffs to U.S. import prices.”

Disputing that conclusion, Hassett argued that U.S. consumers are better off as a result of tariffs, saying the Fed failed to account for changes in import volumes and higher wages of U.S. workers.

“If we bring the stuff home, create the demand at home, then that will hurt China and drive up wages of the U.S., and American consumers will be better off,” Hassett said.

Yesterday’s comments came a day after U.S. Trade Representative Jamieson Greer said that the administration’s tariffs aren’t regressive, reasoning that rich people spend more than poorer consumers.

“It’s not regressive,” he said on CNBC. “Most consumption in America is done by the wealthiest people. So the idea that it’s somehow regressive is just wrong.”

The dollar index continued to climb away from its short-term support level, reaching a high og 97.74 and closing at that level.

The Euro took a hit yesterday after a Financial Times report suggested that European Central Bank President Christine Lagarde might resign early. This speculation comes amid reports that Emmanuel Macron may have a say in her successor ahead of the French Presidential Election. However, the ECB denies that any decision has been made.

European Central Bank Executive Board Member Piero Cipollone confirmed that he had “no news” about ECB President Christine Lagarde resigning before the end of her term.

Yesterday, the Financial Times reported that Lagarde plans to leave her job early, ahead of next year's French presidential election, to give outgoing French leader Emmanuel Macron a say in picking her successor.

Her term is due to end in October 2027, but some fear that the far right may win the French presidential race in the spring of 2027, complicating the selection for the new chief of Europe's top financial institution.

At the end of a meeting of Italy’s banking association, in Rome, Cipollone added that Lagarde was “in full control of the Central Bank and is always guiding us with the necessary strength and energy.”

The leading candidates to replace Lagarde when she leaves the ECB are two former heads of European Central Banks: Klaas Knot and Pablo Hernández de Cos, former heads of the Dutch and Spanish central banks, respectively.

Austrian Finance Minister Markus Marterbauer said he supports maintaining the standard timeline for appointing the next European Central Bank President.

“I think we should stick to the normal timetable, and that’s not a question concerning the French election,” he told reporters in Brussels on Monday when asked if it might make sense to fast-track the decision.

The threat of a far-right candidate winning the French presidential election in April 2027 has raised the question of whether it might make sense to agree on a successor for ECB President Christine Lagarde, together with those for Chief Economist Philip Lane and Executive Board member Isabel Schnabel. Lane’s term ends in May of that year, Lagarde’s in October, and Schnabel’s in December.

The European Central Bank has achieved a monumental victory in its prolonged battle against inflation, according to outgoing Governing Council member François Villeroy de Galhau. This declaration could mark a watershed moment for the Eurozone economy, signalling the potential normalisation of monetary policy after years of aggressive intervention. Consequently, financial markets across Europe are responding with cautious optimism as analysts digest the implications.

Villeroy de Galhau made his definitive statement during a financial conference in Paris. He asserted that the Central Bank has successfully contained the inflationary surge that began in 2021. Moreover, recent data confirms this assessment. The Eurozone’s Harmonised Index of Consumer Prices (HICP) has returned to the ECB’s 2% target, stabilising after reaching a peak of 10.6% in October 2022.

Neither Villeroy nor any of his colleagues has taken time out from their self-congratulations to acknowledge the significant role a strong Euro played in the victory.

Yesterday, the single currency slipped to a low of 1.1872 as the minutes of the latest FOMC meeting were slightly more hawkish than traders had expected. Comparative policy expectations for the ECB and Fed are expected to move in opposite directions over the next eighteen months, with the ECB likely to maintain its reference rate at 2% while the FOMC will at some point begin to lower rates again. This may lead to a surge in the single currency's strength.

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