UK Economic Forecast Update: Trade-offs Intensify Amid Energy Shock

Investing.com—Bank of America Securities on Tuesday sharply cut its growth outlook for the UK, lowering the growth rates for 2026 and 2027 to 0.6% and 1.1%, respectively, while raising its inflation forecasts to 3.5% and 2.5%. The move was driven by expectations that persistently elevated energy prices caused by ongoing conflict will last through most of this year.

The firm currently expects oil prices to hover around $100 per barrel, and UK natural gas prices to be close to 190 pence per therm, through the end of the year—an impact that is expected to be more enduring than previously thought.

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This has prompted economists to revise their outlook for the Bank of England’s interest-rate path. They currently forecast two 25-basis-point rate hikes in June and July 2026 to 4.25%, followed by rate cuts starting in April 2027—once per quarter—for a total of three cuts.

The forecast quarterly growth rate for 2026 averages only 0.1% to 0.2%, and the unemployment rate is expected to rise to 5.3% in the second half of the year. Bank of America does not believe a recession is likely, but it warns that higher inflation will squeeze real incomes and weaken consumer confidence.

The inflation forecast shows prices will reach a peak of 4.1% in the fourth quarter of 2026, while full-year core inflation will rise to 2.9%. The previously expected timeline for inflation to return to the Bank of England’s 2% target in the second half of 2026 has been pushed back to the second half of 2027.

Bank of America expects the finance minister will not break or pause the fiscal rules. Any support measures are likely to be targeted and temporary, with costs in the low tens of billions. Possible measures include delaying the September fuel tax increase or providing targeted support to low-income households.

The firm said the situation is still evolving, and the path of monetary policy will depend on how energy prices develop. If the shock fades by mid-year or if the labor market deteriorates meaningfully, the Bank of England could keep rates unchanged in 2026.

Conversely, if energy prices continue to rise, it could implement more than two rate hikes.

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