Less upbeat outlook for pound amid BoE monetary easing and Starmer woes

Britain’s economy ended 2025 on a sour note, growing by a meagre 0.1% in the final three months of the year (below the 0.2% estimate and matching the tepid pace from Q3).

Growth in the UK economy was almost nonexistent throughout the second half of 2025, with activity stagnating under the pressure of high inflation, rising business costs and a cooling in the jobs market.

The good news is that there may be a faint light at the end of the tunnel. Inflation should continue to fall in the coming months that, along with the transmission of lower MPC rates, should boost household spending power.

The easing of the near-term fiscal uncertainty could also support investment and help facilitate a modest recovery in growth in the first quarter of 2026. This won’t provide too much comfort for the Bank of England, which is now almost certain to cut rates again at either of its March or April meetings - the former is currently more than 60% priced in by swap markets. Next week’s data on inflation and the labour market will be key.

Any further signs of progress towards achieving the 2% inflation target, in particular, could almost guarantee a cut at the bank’s next policy meeting.

The prospect of further policy easing, combined with the acute uncertainty surrounding the future of Prime Minister Keir Starmer, means that we are now slightly less upbeat on the pound than we were not so long ago.