For the data behind the commentary, download the full February 2026 UK Economy & Housing Report.
UNDER PRESSURE?
The UK economy enters 2026 on a cautiously more optimistic footing, though the foundations remain fragile. GDP grew just 0.1% in Q4 2025, matching the previous quarter, rounding out a full-year growth rate of 1.3% for 2025. This was an improvement on the 1.1% recorded in 2024 but below earlier (and our own) expectations of 1.4%. Growth was driven in part by the public sector, particularly through increased government consumption.
As highlighted in the January edition of this publication, sentiment is more positive than it has been. The post-Budget lifting of uncertainty appears to have unlocked a measure of business confidence.
However, the politics of the Peter Mandelson scandal, and the subsequent pressure put on the Prime Minister have highlighted the fact that volatility is never far away, particularly as a result of the precarious public finances. The day that Keir Starmer was called to stand down, the 10-year gilt rose almost 10bp intraday. That move subsequently reversed as a result of the public backings given to the Prime Minister.
With plenty of political hurdles over the coming months, we will continue to see volatility.
RAZOR THIN
The Bank of England's February Monetary Policy Report projects a much sharper decline than previously anticipated, with CPI expected to fall to 2.1% by Q2 2026, 0.7 percentage points lower than the November forecast. This is largely reflecting the energy bills package announced in Budget 2025 and falling wholesale gas prices. The Ofgem price cap is expected to fall to £1,616 in April from £1,758. The BoE's medium-term projection has CPI averaging just 1.7% in 2026 (revised down from 2.2% in November), before rising to 1.8% in 2027 and 2.0% in 2028.
Despite the improved inflation trajectory, the MPC voted 5–4 to hold the Base Rate at 3.75% on 5 February. This was the closest vote split in this cycle. Governor Bailey signalled that "the risks from inflation persistence appear to have continued to reduce" and that he sees "scope for some further easing of policy". The four dissenters favoured a cut to 3.5%, placing greater weight on the risks from weaker demand. The next MPC meeting is on 19 March, but markets are not fully pricing a cut until April or June.
