However, we still expect a slowdown in Q4 2026 and below-potential growth in 2027 to 1.1% annual average. Three factors account for this trajectory: tighter financial conditions, an upward revision to energy prices, which will remain high throughout our forecast period, and an anticipated tightening of monetary and fiscal policy. Inflation is now expected to peak in early 2027 – rather than in November – at around 4% YoY. Higher inflation for longer increases the risk of second-round effects materialising during the next round of wage increases and the Bank of England (BoE) is likely to take action in order to counter this risk. Having kept interest rates on hold in line with expectations, the BoE is likely to follow suit with other major central banks shortly. We anticipate two rate hikes of 25 bps each – in November 2026 and February 2027 – which would take the Bank rate to 4.25%, before easing in H227. The main domestic risk event in the short term is the Autumn Budget on 28 October. This is shaping up to be particularly challenging, requiring fiscal discipline. The Chancellor John Healey will have to rebuild fiscal space within the budgetary rules, which has been significantly reduced by the rise in the cost of servicing the debt. Hence, we expect the Autumn Budget to be primarily a fiscal-repair budget, with the government announcing a net fiscal tightening rather than a large giveaway.

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