Our economic outlook for the United Kingdom
May 26, 2026
BoE to raise rates to lean against inflationary pressures
“Against the backdrop of a soft labor market, any interest rate increases in 2026 should be viewed as ‘insurance hikes’ for risk management purposes. The Monetary Policy Committee has given a clear signal that it views the magnitude of second-round effects from conflict in the Middle East to be lower than during the 2022 Ukraine shock given the current weakness in the labor market.”
Shaan Raithatha,
Vanguard Senior Economist
The Middle East conflict remains front and center for the U.K. economic outlook. Compared with the Ukraine shock in 2022, the labor market is looser, wage growth is softer, and inflation is starting from a lower level. Still, GDP growth was solid in the first quarter, up by 0.6% from the fourth quarter of 2025. We forecast GDP growth of 1.1% in 2026. However, we believe growth will soften the rest of the year as higher energy costs and tighter financial conditions take hold. Our forecast assumes a scenario in which oil prices average $90–$100 per barrel for one to two quarters.
Early evidence suggests higher energy prices are feeding into consumer prices quickly, with annual Consumer Prices Index (CPI) inflation rising from 3.0% in February to 3.3% in March. Moreover, medium-term inflation expectations have edged up. Accordingly, we recently upgraded our 2026 headline CPI forecast by 0.8 percentage points to 3.6%. We expect core inflation to finish the year at 2.8%.
We also now anticipate that the Bank of England (BoE) will raise rates by 50 basis points in 2026 and that these hikes are likely to materialize later than in the euro area. This is because the BoE was in cutting mode before the Middle East conflict and the policy rate is still marginally restrictive at 3.75%.
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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