BoE Chief Economist Huw Pill said on Friday that he does not see a collapse in UK activity. He spoke at an event hosted by Santander in London and referred to forward-looking indicators.
He raised whether firms’ wage and price-setting plans are settling at levels a bit above what fits a 2% CPI target. He said underlying inflation appears to be about 2.5%, rather than 2%.
Uk Growth And Inflation Outlook
He said UK growth is positive but not very dynamic, with a strong cyclical element. He added that forward-looking indicators do not point to a collapse in activity.
He said supply constraints may help explain the weak activity. He also said a large part of the rise in the UK unemployment rate is likely to be structural rather than cyclical.
It appears the key issue is that underlying inflation is settling near 2.5%, not the 2% target, which will guide Bank of England policy. The latest CPI data for January 2026 confirmed this trend, holding firm at 2.6% and resisting a significant move down. This means derivative markets should price in fewer, or later, interest rate cuts than previously anticipated for the remainder of this year.
This persistent inflation, combined with steady if unspectacular growth, should continue to support the pound sterling. We saw during 2025 how interest rate differentials were a primary driver of G10 currency pairs, a pattern which is likely to persist. Traders might view any weakness in the GBP/USD exchange rate as an opportunity to build long positions.
Uk Equities And Unemployment Implications
For UK equities, the outlook suggests a constrained environment. The recent January 2026 manufacturing PMI reading came in just below the neutral 50 mark, underscoring the lack of dynamic growth and potential pressure on corporate earnings. This scenario favours strategies for the FTSE 100 that profit from range-bound price action, such as selling out-of-the-money call options.
The idea that much of the rise in unemployment is structural rather than cyclical is also crucial. The jobless rate, which rose through most of 2025 to reach 4.5% in the fourth quarter, is unlikely to fall sharply even if economic activity improves slightly. This gives the Bank another reason to be patient and hold rates higher for longer to ensure inflation is truly contained.
