Our economic outlook for the United Kingdom
January 13, 2026
BoE likely to cut rates further after budget release
“The U.K. budget was, on balance, good news for growth and inflation in 2026 and will pave the way for more Bank of England rate cuts.”
Shaan Raithatha,
Vanguard Senior Economist
The U.K. budget, released November 26, was, on balance, good news for growth, inflation, and fiscal sustainability. Most of the £26 billion worth of tax increases will come from 2028 onward, while day-to-day spending will rise modestly in the near term. We recently upgraded our 2026 GDP forecast by 0.2 percentage points to 1%.
A large chunk of the gap between current inflation and the 2% Bank of England (BoE) target is due to regulated prices, including energy and water bills. We forecast U.K. inflation to fall sharply in 2026 as the government’s announced policy measures directly lower energy prices and challenging year-earlier comparisons for some of these components unwind.
The BoE cut the bank rate again in December, to 3.75%. We expect the rate will be cut twice more in 2026, with the next cut likely in April. Accordingly, we expect the bank rate to end 2026 at 3.25%, which is around our assessment of the neutral rate, or the rate that would neither stimulate nor restrict economic activity.
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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