According to economists, the Bank of England is expected to continue cutting interest rates until 2026, as the UK economy faces ongoing inflationary pressures and a tight labor market.
S&P Global’s latest forecasts predict that interest rates will decline “gradually,” with inflation reaching 2.6% by the end of this year, falling to 2.3% by the end of 2025, and 2% by 2026. However, S&P anticipates a sharper drop in rates than markets expect, forecasting a decrease to 3% by early 2026.
Money markets currently project interest rates will decline to around 3.5% over the next two years.
S&P also revised its forecast for UK GDP growth this year, raising it from 0.6% to 1%, as the economy benefits from easing inflation and rate cuts.
However, analysts warned that the “surprisingly resilient” job market remains the primary source of inflationary pressure.
Senior economist Marion Amiot commented, “Despite tight monetary policy, the UK economy has performed better than expected this year.
While we don’t see evidence of a fundamental shift in wage setting, we believe the Bank of England’s 2% inflation target will require a more relaxed labor market. As a result, we anticipate a very gradual rate-cutting cycle, with rates reaching 3% by early 2026.”
