BNP Paribas projects that the UK economy will experience a notable slowdown in growth, with GDP expansion expected to decrease from 1.4% in 2025 to 0.7% in 2026. The quarterly growth momentum is forecasted to drop to approximately 0.1%, following a +0.4% quarter-on-quarter increase in Q1 2025 [1]. This deceleration is anticipated to occur amid renewed inflationary pressures, attributed to the war in Iran, which is expected to push inflation up to 3.4% year-on-year before it gradually eases to 3.23% in 2027. Despite this moderation, inflation is projected to remain well above the Bank of England's target [1].
In response to these persistent inflationary pressures, BNP Paribas expects a shift in monetary policy, with a tightening of 50 basis points anticipated in 2026, contrary to earlier expectations of policy easing. Additionally, 10-year gilt yields are forecasted to remain elevated throughout 2026, only declining to 4.30% in 2027 as net supply decreases, political risk premia fall, and the market begins to anticipate potential BoE rate cuts [1].
On the currency front, BNP Paribas anticipates stabilization of both the yen and the British pound against the US dollar in 2026, projecting USD/JPY at 160 and GBP/USD at 1.35 by the fourth quarter of 2026 and into 2027 [1].
No immediate market reactions or analyst opinions beyond BNP Paribas' forecasts are discussed in the article.
CONCLUSION
BNP Paribas' outlook signals a challenging period ahead for the UK, with slower growth, persistent inflation, and tighter monetary policy expected through 2026. Elevated gilt yields and a stable pound are also anticipated, reflecting ongoing economic and geopolitical pressures. Market participants may need to adjust expectations for rate cuts and bond yields in the near term.