BoE Chief Economist Huw Pill said on Friday that he does not expect a collapse in UK economic activity. Speaking at an event hosted by Santander in London, he pointed to forward-looking indicators.
He questioned whether firms’ wage and price plans are settling at levels slightly above what is consistent with a 2% CPI target. He said underlying inflation looks closer to 2.5% than 2%.
He said UK growth is positive but not very strong, with a clear cyclical element. He added that forward-looking indicators do not suggest a collapse in activity.
He said supply constraints may help explain the weak pace of activity. He also said much of the rise in the UK unemployment rate is likely structural rather than cyclical.
The main issue appears to be that underlying inflation is settling around 2.5%, not the 2% target—and this will shape Bank of England policy. The latest CPI data for January 2026 supports this view: inflation held at 2.6% and did not fall meaningfully. As a result, derivatives markets are likely to price in fewer rate cuts, or later cuts, than previously expected for the rest of this year.
This sticky inflation, together with steady (if unspectacular) growth, should keep supporting the pound. In 2025, interest rate differentials were a key driver of G10 currency pairs, and that pattern is likely to continue. Traders may treat any weakness in GBP/USD as a chance to build long positions.
For UK equities, the outlook points to limited upside. The January 2026 manufacturing PMI was just below the neutral 50 level, highlighting weak momentum and the risk of pressure on earnings. This environment tends to favour FTSE 100 strategies that benefit from range-bound markets, such as selling out-of-the-money call options.
Pill’s view that much of the rise in unemployment is structural is also important. The jobless rate rose through most of 2025 and reached 4.5% in Q4. It is unlikely to fall quickly, even if activity improves modestly. That gives the Bank another reason to be patient and keep rates higher for longer to ensure inflation is fully under control.
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