BNP Paribas Predicts UK Growth Slowdown, Higher Rates, and Pound Depreciation
BNP Paribas strategists are forecasting a slowdown in United Kingdom (UK) growth to 1% in 2026 from 1.3% in 2025, with renewed inflation pressures from the war in Iran pushing inflation to 3.2%. This slowdown is set against a backdrop of economic activity decelerating to approximately +0.1% quarterly pace for the remainder of the year.
The strategists expect a 25 bp Bank of England (BoE) rate hike in H2 2026, with 10-year gilt yields staying elevated before easing in 2027. They anticipate a depreciation of the British Pound (GBP) against the US Dollar (USD) into 2027.
The expected inflationary pressures are driven by the war in Iran and are projected to reach 3.2% year-over-year, remaining sticky and well above BoE's target at +3.1% in 2027. As a result, monetary policy is shifting toward a 25bp rate hike in H2 2026.
The strategists also anticipate that 10y gilt yields will remain elevated in 2026 before falling to 4.30% in 2027 on reduced net supply and a decline in political risk premia.