BNP Paribas economists project that the United Kingdom will experience a slowdown in economic growth, with GDP expansion expected to decrease from 1.4% in 2025 to 0.7% in 2026. The quarterly growth rate is forecasted to drop to approximately 0.1%, following a +0.4% quarter-on-quarter increase in Q1 2025 [1]. This deceleration is attributed to renewed inflationary pressures, which BNP Paribas links to the war in Iran. Inflation is anticipated to rise to 3.6% year-on-year before only gradually easing to 3.3% in 2027, remaining above the Bank of England's (BoE) target [1].
In response to persistent inflation, BNP Paribas expects the BoE to implement a 50 basis point monetary tightening in 2026, a shift from the previously anticipated easing scenario [1]. The report also notes that 10-year UK gilt yields are likely to remain elevated throughout 2026, before declining to 4.30% in 2027. This projected decline is attributed to reduced net supply, a decrease in political risk premia, and market expectations of future BoE rate cuts [1].
Additionally, BNP Paribas forecasts stabilization of the yen and the British pound against the US dollar in 2026, with 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' projections are discussed in the article.
CONCLUSION
BNP Paribas anticipates that persistent inflation will force the Bank of England to tighten monetary policy in 2026, despite slowing UK growth. Elevated gilt yields and a stable GBP/USD exchange rate are expected, with inflation remaining above target into 2027. The outlook suggests a challenging environment for UK assets in the near term.