In the face of stronger-than-expected global growth, rate cuts could reignite inflation
20 FEB, 2026
By David Rees from Schroders
David Rees, Head of Global Economics at Schroders
We continue to expect global growth to be stronger than generally anticipated, providing a supportive backdrop for risk assets. However, given that central banks appear willing to take advantage of temporary dips in inflation to cut interest rates further and maintain accommodative monetary conditions, we remain concerned that faster growth could ultimately lead to higher long-term inflation. These risks may push up long-term interest rates, triggering further episodes of market volatility and once again highlighting the fragile dynamics of sovereign debt.
Perhaps the biggest change in our forecasts is that we now expect further rate cuts in the United States and the United Kingdom. To be clear, we do not believe that additional easing from this point is fully justified by macroeconomic fundamentals—especially in the United States, where consumer spending is booming. However, policymakers appear inclined toward easing and are therefore likely to seize any opportunity to cut rates.
In the United Kingdom, budget measures are likely to reduce headline inflation to the 2% target in April, while in the United States recent price data appear to have been artificially lowered due to the loss of October data, when the Fed decided not to publish the CPI because of the federal government shutdown. This comes at a time when many will be focused on the disinflation of rents. These factors may give policymakers an opportunity to implement easing measures this year. However, with growth holding up and limited reliable evidence of genuine weakness in the labor market—at a time when core services inflation remains elevated—the risks of an unpleasant inflation shock in the future are increasing.
We expect U.S. GDP growth to exceed 3% this year, as the surge in consumer spending appears set to be supported by additional monetary and fiscal policy backing, along with strong investment in technology. Job creation should rebound, as solid demand combined with tighter immigration policies that restrict labor supply will re-tighten the labor market and support real wages. Consequently, we believe the balance of risks is tilted toward higher inflation.
In the euro area, growth is on track to exceed consensus expectations in 2026–2027. Manufacturing will regain momentum, particularly in Germany, where increased spending on defense and infrastructure is expected. Headline inflation will temporarily moderate below the European Central Bank’s (ECB) target in early 2026, but persistent services inflation driven by wages is likely to prompt the ECB to tighten policy from mid-2027.
UK growth remains sluggish, and temporary declines in headline inflation are likely to trigger further rate cuts by the Bank of England in the spring. However, disinflationary fiscal policies that ease energy inflation may leave underlying pressures intact, especially as the labor market has yet to show decisive signs of slowing. As a result, an upside inflation surprise in 2027 is possible, which would likely prevent the Bank of England from continuing to cut rates and could renew upward pressure on long-term government bond yields, once again highlighting fiscal risks.
China’s economy may experience a temporary rebound, but the ongoing deflationary downturn in the property sector suggests that the recovery will not last, as the effects of stimulus fade. Weak domestic demand makes it unlikely that companies will pass rising global commodity costs on to households, although exporters might do so. This could shift price pressures abroad, adding to goods inflation in other economies.
