Our economic outlook for the United Kingdom

A dovish tone at the Bank of England (BoE) policy meeting in February, coupled with a soft January inflation print and cooling labor market indicators, appeared to set the stage for a March rate cut. The rate-setting committee reiterated that the risk of persistent inflation has become less pronounced. We expect the BoE will cut its policy rate twice in 2026, with the next cut at its March meeting. We continue to anticipate that the bank rate will end 2026 at 3.25%.

However, conflict in the Middle East complicates our outlook, adding risk that the BoE may delay a rate cut beyond its March 19 policy announcement. Oil prices have spiked since the start of the conflict. We estimate that a sustained 10% rise in energy prices would add 0.1 to 0.2 percentage points to headline inflation and trim 0.1 percentage points from GDP.

We expect inflation to fall materially in 2026 as government measures lower energy prices, economic slack builds, and base effects—unfavorable year-earlier comparisons—unwind. We continue to anticipate that headline inflation will drift down to 2.2% by year-end 2026 and core inflation to 2.6%, with risks skewed to the downside. Year-over-year headline inflation was 3% in January, while year-over-year core inflation (which excludes volatile food, energy, alcohol, and tobacco prices) was 3.1%.

We expect real income growth to moderate further this year amid a weak labor market. Meanwhile, fiscal policy will be modestly supportive of activity as day-to-day departmental spending ramps up. We don’t expect a strong AI-driven impulse to investment, unlike in the United States. Our 2026 GDP forecast for the U.K. is 1%.