UK CPI Moderates as Expected, Pound Stabilizes, and Lagarde’s Future at ECB in Question

Author: Kathleen Brooks, Research Director UK

Date: 18 February 2026

Key Takeaways

• CPI on track to fall to BOE’s target in Q2.
• March rate cut anticipated but not yet confirmed.
• Labour market remains a key focus for the Bank of England (BOE).
• Government may reverse course to address unemployment concerns.
• Pound stabilizes but is still at risk of further declines.

UK Inflation Overview

UK inflation moderated as expected in January, with the Consumer Price Index (CPI) registering a headline rate of 3%, down from 3.4% in December. This decline was primarily driven by lower petrol and airfare prices, alongside a moderation in food price inflation, marking the lowest CPI level since March 2025.

Future CPI Expectations

The BOE anticipates that the CPI will continue to decrease, aiming to reach the 2% target by April. The current data suggests that the CPI is on track to meet these forecasts. However, the core inflation rate was slightly higher than expected at 3.1%, while service price growth decreased marginally to 4.4% from 4.5% at the end of the previous year.

Interest Rate Outlook

Following recent weak labour market data, the interest rate futures market is now pricing in an 82% chance of a rate cut in March, with another cut expected between September and November. Current projections suggest UK interest rates may end the year around 3.22%, down from 3.34% at the start of 2026.

Labour Market Concerns

The BOE is increasingly focused on the labour market, as recent economic data indicates a significant deterioration. Moderating wage growth is expected to positively influence CPI forecasts. Hawkish BOE member Catherine Mann highlighted a connection between rising minimum wages and increasing youth unemployment, suggesting that the BOE's focus may shift more towards labour market issues.

Government Response to Unemployment

In light of rising youth unemployment, the UK government is reportedly reconsidering its commitment to equal minimum wage for young workers. With one in six individuals aged 18-24 currently unemployed, this potential policy shift could impact BOE decisions moving forward.

Pound's Performance

The pound has stabilized after a recent sell-off, currently trading around $1.3550 against the dollar. Despite this stabilization, the pound remains vulnerable to further declines due to deteriorating economic data. The 10-year Gilt yield has decreased by 10 basis points, further weakening support for the pound.

Eurozone Developments

In the Eurozone, the euro has weakened amid speculation regarding ECB President Christine Lagarde's potential departure. Although the ECB has denied these rumors, the situation remains fluid, as the next ECB chair will significantly influence Eurozone interest rate policy.

Conclusion

The UK economic landscape is currently characterized by moderating inflation, a focus on the labour market, and potential shifts in government policy to address unemployment. The pound's stability is precarious, and developments in the Eurozone may further impact market dynamics.