Our economic outlook for the United Kingdom
February 12, 2026
Dovish tone sets the stage for a March rate cut
“A dovish tone at the Bank of England meeting in early February has set the stage for a March rate cut, after the Monetary Policy Committee slashed its two-year-ahead inflation forecast from 2.1% to 1.8%.”
Shaan Raithatha,
Vanguard Senior Economist
We expect U.K. real income growth to moderate further amid a weak labor market in 2026. 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 growth forecast for the U.K. is 1%.
We anticipate that U.K. inflation will fall sharply in 2026, as base effects—unfavorable year-earlier comparisons—unwind and government measures result in lower energy prices. The budget’s package to directly reduce household energy bills is expected to decrease inflation by 0.2 percentage points this year. We continue to expect headline inflation to drift down to 2.2% by the end of 2026.
A dovish tone at the Bank of England (BoE) meeting in early February has set the stage for a March rate cut. The Monetary Policy Committee reiterated that the risk of persistent inflation has continued to become less pronounced, and it slashed its two-year-ahead inflation forecast from 2.1% to 1.8%. We expect the BoE to reduce its policy interest rate twice in 2026, with the next cut now likely in March. We continue to anticipate that the bank rate will end 2026 at 3.25%.
United Kingdom economic forecasts
Notes: GDP growth is defined as the annual change in real (inflation-adjusted) GDP in the forecast year compared with the previous year. Unemployment rate is as of December 2026. Core inflation is the year-over-year change in the Consumer Prices Index, excluding volatile food, energy, alcohol, and tobacco prices, as of December 2026. Monetary policy is the Bank of England’s bank rate at year-end.
Source: Vanguard.
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