A recent survey of economists indicates that the Bank of England is expected to keep interest rates unchanged throughout 2026, despite rising inflation driven by energy shocks from the Middle East conflict. The survey shows economists have raised their inflation forecasts for each quarter of 2026, projecting inflation to peak at 3.3% in the second half of the year. Nevertheless, economists anticipate the central bank will likely maintain the benchmark rate at 3.75% until the first quarter of 2027, followed by two 25-basis-point rate cuts later next year.
This survey outcome presents a clear divergence from current market pricing. Traders are currently betting on a 25-basis-point rate hike by the BOE before September, with approximately a 45% probability priced in for an additional hike by year-end. Prior to the outbreak of the Middle East conflict, markets had been anticipating rate cuts from the BOE this year.
Sanjay Raja, Chief UK Economist at Deutsche Bank, commented, "Looking ahead, we expect UK economic growth to moderate. Although some downside risks to the economic outlook have diminished, we still believe risks to economic activity remain tilted to the downside relative to our core forecast."
The UK's economic growth prospects have weakened, weighed down by soaring energy costs. The survey, conducted between April 9th and 15th, forecasts UK economic growth of 0.7% in 2026 and 1.2% in 2027, both figures lower than previous projections. The International Monetary Fund also downgraded its UK growth expectations this week. The IMF now expects the UK economy to grow by just 0.8% in 2026, significantly below its previous forecast of 1.3%. This represents the largest downgrade among major advanced economies, reflecting the high cost of inflationary shocks stemming from the Middle East conflict.
Pierre-Olivier Gourinchas, the IMF's Chief Economist, attributed the downgrade to three main factors: reliance on natural gas imports, a lack of energy storage capacity, and weak economic growth witnessed late last year following the implementation of Chancellor Reeves' £30 billion tax increase plan. Gourinchas noted the UK's energy mix is highly dependent on natural gas, prices for which have doubled due to the conflict. While much gas is domestically produced, some must be imported at significantly higher market prices. Experts warn that UK household gas and electricity costs could rise by nearly 20% this summer, pushing the average July bill close to £2,000.
Beyond the IMF's downgrade, recent data also points to a dim growth outlook. The UK S&P Global Purchasing Managers' Index fell to a six-month low of 50.3 in March, down significantly from the previous 53.7, and well below the preliminary estimate of 51. Although still above the 50-mark theoretically indicating expansion, the figure signals near-stagnation. Furthermore, a quarterly survey of UK chief financial officers by Deloitte, one of the world's four largest accounting firms, showed the net confidence index plummeting to -57% in the latter half of March from -13% at the end of 2025, the lowest reading since the first quarter of 2020 during the COVID-19 outbreak. Simultaneously, businesses' inflation expectations for one year ahead rose to 3.6%, the highest level since the third quarter of 2023. Chancellor Reeves has previously cited the Deloitte CFO survey as a key barometer of UK business sentiment.
Deloitte stated that as global energy prices surge due to worsening Middle East geopolitics, signs of global stagflation are becoming more evident, prompting businesses worldwide to rapidly shift into cost-cutting mode, impacting hiring, discretionary spending, and long-term investment plans. The survey indicated that 61% of CFOs are highly concerned about rising interest rates driven by energy prices, inflation, and potential "stagflation." Ian Stewart, Chief Economist at Deloitte UK, said, "In the last 16 years, UK CFOs have rarely been as focused on conservative measures like cost control and cash retention as they are today." Deloitte found that 79% of surveyed CFOs expect a significant decline in hiring over the next 12 months, the highest proportion since the second quarter of 2020, and substantially higher than the 55% recorded at the end of last year.
Despite soaring energy costs also heightening upside risks to UK inflation, market expectations for a BOE rate hike this year have cooled due to the weakening growth outlook and recent signs of easing Middle East tensions. The survey results echo recent remarks from BOE Governor Andrew Bailey. Bailey stated in an interview that the central bank will "not rush to judgment" regarding interest rate decisions in the face of energy price shocks from the Middle East conflict. He explicitly noted that increases in oil and gas prices "undoubtedly" feed into overall price levels, but deciding on rates has become "very, very difficult" due to multiple intersecting uncertainties. Bailey further explained, "Some very tough judgments indeed need to be made, and we will not rush to conclusions on these issues because there are many uncertainties—not just about how events will evolve, but also about how these changes will transmit and affect the UK economy."
Market analysts suggest Bailey's comments aim to temper the market's aggressive pricing for rate hikes. Back in March, when the BOE held rates steady, Bailey had warned that market expectations for subsequent hikes were an "overreaction" and "getting ahead of themselves." Bruna Skarica, UK Chief Economist at Morgan Stanley, stated in a report that the BOE is likely to keep rates at 3.75% in the coming months rather than hike. Skarica noted that the Middle East conflict increases UK inflation risks, but a weak labor market could limit the rise. She suggested that if global energy supplies normalize, the BOE could potentially signal rate cuts as early as the fourth quarter of 2026. Callum Pickering, Senior Economist at Peel Hunt, also stated that the likelihood of a BOE rate hike in 2026 has diminished despite inflation concerns. He pointed out that the market's previous expectation for the BOE to begin a hiking cycle in 2026 is undergoing a logical correction, as the trajectory of the Middle East conflict has effectively replaced domestic economic data as the decisive variable for the short-term rate path. Peel Hunt's base case anticipates a relatively swift resolution to the Middle East conflict, reopening the Strait of Hormuz and allowing energy price shocks to subside. Once the situation cools, the pricing logic would swiftly shift from "preventing runaway inflation" to "rescuing a economic slowdown," potentially creating room for the BOE to cut rates within the year. However, Pickering added that if the Middle East war persists, "the BOE might be forced into aggressive action to boost confidence and stabilize inflation expectations."
The BOE's next interest rate decision is scheduled for April 30th. At that meeting, Governor Bailey and his colleagues will be compelled to provide a clear policy response to the complex macroeconomic situation. Analysts generally believe that if geopolitical tensions do not escalate sharply in the next two weeks and oil prices retreat, the BOE will most likely choose to keep rates unchanged while maintaining flexibility for future actions in its statement. Conversely, if inflation expectations show signs of becoming unanchored, a "defensive" modest rate hike remains a possibility.
Chancellor Reeves is expected to announce a new plan later this week aimed at helping businesses cope with high energy costs. Timely fiscal support could potentially alleviate some pressure on the BOE to tighten monetary policy in the short term.
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