26 January 2026: The economy could be heading for a rough patch

The Bank of England may not be able to lower interest rates as much as expected this year due to strong UK pay growth and expected US rate cuts, one of its top policymakers has said.

Megan Greene, a member of the Bank’s Monetary Policy Committee, said she was concerned that wages appeared to be growing strongly again, which could prevent inflation from easing.

In a speech in London at the Resolution Foundation, a leading thinktank, Greene said a decline in wage growth “may have run its course”, pointing to recent Bank of England surveys that suggest employers are planning to hand out pay rises of 3.5% or more this year.

The latest official figures showed wage growth weakened slightly to 4.5% between September and November, from 4.6% in the previous three months.

The MPC has a target of 2% inflation, but figures released this week showed it reached 3.4% in December, up from 3.2% in November. Consistent wage growth pushes up inflation if there is not a corresponding rise in productivity growth, and Greene said she was “certainly sceptical” that productivity would rebound this year.

Greene said the MPC’s decision on when to lower borrowing costs would also be affected by whether the US Federal Reserve lowered rates, as this could push UK inflation higher.

“If the Fed were to cut rates more aggressively than the Bank of England this year, this should cause US demand for UK exports to rebound, providing upward pressure on UK inflation,” she said.

The Bank of England has admitted it has been consistently wrong on inflation for years.

Inflation exceeded one of the Bank’s forecasts by more than 8 percentage points at the end of 2022, the evaluation report found, owing to a 600% increase in gas prices in the wake of Russia’s invasion of Ukraine.

Modelling carried out by the Bank’s economists found that the energy crisis accounted for around half of the inflation forecasting error, or 4%

The report will feed into criticism that the Bank of England was too late to notice the surge in the cost of living between 2021 and 2023, leading to interest rates not rising quickly enough to tame rising prices.

Inflation peaked at a 40-year high of 11.1% in October 2022, while the Central Bank lifted interest rates from near zero to 5.25% in less than two years. Rates have since been cut to 3.75 per cent, including four 0.25% reductions last year.

Businesses say the economy is heading for another slump and warn things could get worse on Labour’s watch.

The CBI expects economic activity to fall again over the next three months, according to a new report.

Companies say they are being squeezed by rising costs, including last year’s hikes in employer National Insurance and the National Living Wage.

Businesses have also paused key decisions because of fears over more tax changes in this year’s Autumn Budget.

CBI Deputy Chief Economist Alpesh Paleja said the UK had “not experienced a strong start to 2026”, warning weak growth and rising costs risk a “further squeezing of margins and dampening investment”.

He urged ministers to lower energy bills and cut red tape to help firms get back on track.

Britain’s business secretary has called for MPs’ pay to be directly linked to GDP to incentivise Westminster to prioritise economic growth. Peter Kyle suggested a change in remit for the Independent Parliamentary Standards Authority. This body oversees MPs’ salaries, as he called for more government departments to focus on boosting growth.

He told the FT: “I would really love for IPSA to peg MPs' and ministerial pay to our growth rates as a country, as opposed to what it is at the moment, which is a slightly byzantine formula. I’m serious. I would love them to.” Asked whether Labour MPs would appreciate the suggestion, Kyle said: “They’re not as enthusiastic as I am, but if we get the economy growing at, for example, 5%, we would be fulfilling our potential.”

The pound rallied significantly last week as the market began to show concern about the impact Donald Trump may have on inward investment in the U.S., lowering its risk appetite. Sterling reached a high of 1.3638 and closed just two pips lower at 1.3636.

Since Donald Trump returned to office a year ago, every policy of the United States Government has been turned on its head. From trade to foreign policy and from immigration to healthcare, the new President has arrived with the grace and finesse of a hurricane.

As the country moves forward with its MAGA policies, investors, both domestic and international, will begin to shy away from an economy that defies analysis.

Trump is unable to fathom why he cannot control monetary policy, since he feels interest rates should be lower, regardless of inflation. Jerome Powell, one of the most tenacious and mindful of Fed chairpersons, has been caught up in the maelstrom.

He has been given a hard time by Trump and his sycophants for doing no more than his job in complying with the Central Bank’s dual mandate.

The majority of Powell’s colleagues on the FOMC are in favour of Powell’s approach to monetary policy, which should be more than enough reason for the country to accept the FOMC's processes and decisions.

Weaponising trade policy has backfired, maybe not disastrously, but with enough effect to show the public that Trump has been wrong to try to bring the country’s partners in line.

Inflation, trade, employment, and activity are the cornerstones of any economy and can be relied upon to provide an accurate picture. However, while Trump continues to ignore the economic norms that drive the global economy, investment will continue to shrink, no matter the President's and his Cabinet's outrageous statements.

JP Morgan CEO Jamie Dimon isn’t known for sugarcoating economic risks, but his latest warning is perhaps his bluntest assessment yet.

Dimon argues that the ballooning U.S. national debt, which sits around $38.4 trillion, is “not sustainable”.

Speaking to Carlyle cofounder David Rubenstein at a U.S. Chamber of Commerce event, Dimon said the country can’t continue to borrow recklessly without consequences.

Going deeper into his rationale for his disturbing take, Dimon said the U.S. economy is being crushed by two powerful forces he called its tectonic plates.

One of those plates is entirely homegrown, while the other is global and a lot less predictable. Collectively, though, as Dimon suggested, they can collide in ways that may have profound effects on the fragile financial system.

He describes the situation as a ticking time bomb, though he doesn’t have a clear timeline for when the markets may start to act up.

“It will not work eventually. I just don’t know when that is.”

Moreover, he described the U.S. as “going broke slowly” and said the current fiscal trajectory is clearly unsustainable, with the danger plainly visible, but the brakes still left untouched.

The second plate is geopolitics.

Dimon feels that trade relationships are wearing thin while the country’s rivals are colluding, challenging the post-War system in the process.

That’s a massive problem because the U.S. is still reliant on overseas sources for primary inputs, such as rare-earth minerals and key pharmaceutical ingredients. So the slightest shock will likely affect prices, supply, and domestic investments.

The market is beginning to exhibit cracks due to the unpredictability of U.S. economic policy. The Dollar index fell to a low of 97.47 last week and closed at 97.52. These concerns drove the gold price above $5,000 for the first time.

The global economy is showing unexpected resilience despite the noise, European Central Bank (ECB) President Christine Lagarde, International Monetary Fund (IMF) head Kristalina Georgieva and World Trade Organisation (WTO) head Ngozi Okonjo-Iweala said in a panel discussion at the World Economic Forum in Davos last week. But while growth is holding up, troubles like worrisome levels of government debt and inequality loom.

That resilience is holding up despite disruptions from U.S. trade policy under President Trump, who roiled the weeklong forum with threats to impose tariffs on countries supporting Greenland against a U.S. takeover bid, then withdrew the tariff proposal.

What is now needed, they said, are efforts to boost growth to offset heavy debt levels around the world and ensure that disruptive technologies like artificial intelligence don’t worsen inequality or devastate labour markets. And Europe needs to boost productivity and improve its business climate for investment.

Georgieva said the IMF’s recently raised forecast of 3.3% global growth for this year was “beautiful but not enough, do not fall into complacency.”

She said that level of growth wasn’t enough to wear down “the debt that is hanging around our necks” and that governments need to take care of “those who are falling off the wagon.”

“We have to look at Plan B, or Plan C,” said Lagarde. “I think we’ve had a lot of noise this week, and we need to distinguish the signal from the noise. We should be talking about alternatives.”

After a week of hearing various officials denigrate Europe, its leaders and its regulations at Davos, Lagarde said that the harsh words could be just what the continent needed.

Lagarde had walked out of a Davos dinner during a speech critical of Europe by U.S. Commerce ‍Secretary Howard Lutnick.

Among the more rankling comments was U.S. Treasury Secretary Scott Bessent’s quip in a TV interview dismissing “the dreaded European working group” in response to potential U.S. tariffs aimed at seeking control of Greenland.

Ukraine’s President Volodymyr Zelenskyy, meanwhile, blasted the EU’s lack of “political will” in countering Russian leader Vladimir Putin.

Eurozone private sector activity expanded for the eighth month in a row in January. Still, a troubling uptick in services inflation may complicate the European Central Bank’s interest-rate path this year.

The latest flash Purchasing Managers’ Index (PMI) surveys show that the region's economy is still on a fragile growth path at the start of the new year.

The composite PMI for the euro area, which captures output across manufacturing and services, remained unchanged at 51.5 in January, slightly below the 51.8 expected.

“The recovery still looks rather feeble,” said Dr Cyrus de la Rubia, chief HCOB economist.

While service activity remained in expansion territory, the sector showed signs of cooling.

The eurozone services PMI declined to 51.9 in January, its lowest level in four months, from 52.4 in December, falling short of the anticipated 52.6.

Growth in the manufacturing sector, meanwhile, continued to struggle, with the PMI remaining slightly below the 50-point threshold for the third consecutive month, indicating ongoing contraction.

Still, the most pressing concern emerging from January's data is the reacceleration of services sector inflation.

Although eurozone inflation fell to 1.9% in December, below the European Central Bank’s 2% target, the January PMI report indicates that underlying price pressures are far from subdued.

"Inflation in the services sector, which the Central Bank is watching particularly closely, has increased significantly in terms of sales prices," said de la Rubia.

Sales price inflation reached its highest level since April 2024, driven primarily by the services sector. By contrast, manufacturing output prices continued their marginal decline.

"For the ECB, these results are anything but reassuring," de la Rubia added, suggesting that policymakers may feel vindicated in their cautious stance.

The Euro enjoyed a solid rise last week, which brought the 1.20 level back into focus. It reached a high of 1.1826 and closed at 1.1821. There is some resistance expected around 1.1910 before any attempt at the summit (1.20) can be contemplated.

Have a great day!