BNP Paribas strategists expect United Kingdom (UK) growth to slow to 1% in 2026 from 1.3% in 2025, with renewed inflation pressures from the war in Iran pushing inflation to 3.2%. They now anticipate a 25 bp Bank of England (BoE) rate hike in H2 2026, with 10-year gilt yields staying elevated before easing in 2027. British Pound (GBP) is forecast to depreciate against the US Dollar (USD) into 2027.

Sticky inflation and gilt yields shape Pound

"Economic activity is expected to slow in 2026, with growth decelerating to 1% from 1.3% in 2025; following +0.4% q/q in Q1 and -0.1% m/m in April, growth increased by +0.1% m/m in May, bringing the average quarterly pace for the remainder of the year down to approximately +0.1%."

"This slowdown is set against a backdrop of renewed inflationary pressures triggered by the war in Iran: inflation is projected to reach 3.2% y/y, and to remain sticky and well above BoE's target at +3.1% in 2027."

"In this context, and contrary to the initially envisaged easing scenario, monetary policy would shift toward a 25bp rate hike in H2 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 a depreciation of the yen and the GBP against the dollar in 2026 (USD/JPY 165 and GBP/USD 1.32 by Q4 2026) and 2027."

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