GBP: Higher inflation keeps BoE on tightening path – BNP Paribas

BNP Paribas economists expect United Kingdom (UK) growth to slow to 0.7% in 2026 from 1.4% in 2025, with quarterly expansion dropping to about 0.1%. Inflation is projected to rise to 3.6% year-on-year before easing only gradually, prompting a 50 bps monetary tightening in 2026, while 10-year gilt yields stay elevated before falling to 4.30% in 2027.

UK outlook constrained by inflation

"Economic activity is expected to slow down in 2026, with growth limited to 0.7% after 1.4% in 2025; following a forecasted +0.4% q/q in Q1, the average quarterly pace would fall to around +0.1%."

"This slowdown would occur against a backdrop of renewed inflationary pressures triggered by the war in Iran: inflation would reach 3.6% y/y before easing only gradually to 3.3% y/y in 2027, remaining well above BoE's target."

"In this context, and contrary to the initially envisaged easing scenario, monetary policy would shift toward a tightening of 50 basis points in 2026."

"10y gilt yields will remain elevated in 2026, before falling to 4.30% in 2027 on reduced net supply, a decline in political risk premia and a market starting to eye BoE rate cuts."

"We anticipate stabilisation of the yen and the GBP against the dollar in 2026 (USD/JPY 160 and GBP/USD 1.35 by Q4 2026) and 2027."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)