Our economic outlook for the United Kingdom

A material decline in oil prices, moderating wage growth, and weakness in some services components have led us to revise our inflation forecasts lower. Our new inflation outlook and a dovish July policy meeting have further led us to revise our forecast for the year-end monetary policy rate lower.

Headline inflation eased to 2.6% in June, and while this masked a pickup in energy inflation, oil prices have since receded to just above $80 per barrel. Services inflation moderated from 4.4% to 3.6% from January to June, with core CPI falling from 3.1% to 2.6%. Accordingly, we have downgraded our year-end headline CPI forecast by 50 basis points to 3.1% and our year-end core inflation forecast by 20 basis points to 2.6%. Still, longer-term household inflation expectations remain elevated. This is likely a consequence of inflation not having sustainably returned to 2% since the 2022 Ukraine shock and remains a key risk to the outlook.

We now expect the Bank of England (BoE) to keep the bank rate on hold at 3.75% through 2027. The BoE’s July statement highlighted little evidence of “second-round effects in price and wage-setting” and “clear signs of underlying disinflation,” reinforcing the view that there is no urgency to tighten. Tighter market-implied financial conditions may do some of the work for the bank.

The energy shock remains the key driver of economic activity, and it has evolved broadly in line with our base case. Following a strong first quarter, driven by private and public consumption, we leave our 2026 growth forecast unchanged at 1.1%. We expect activity to soften through the remainder of the year as elevated energy costs and tighter financial conditions weigh on demand. Growth should remain broadly stable around 1.2% in 2027 as the drag from the energy shock fades.

On fiscal policy, the appointments of a new prime minister and chancellor have increased uncertainty, though the government’s commitment to fiscal credibility suggests any changes are likely to be gradual, implying only modest shifts in the U.K.’s fiscal trajectory.