Future Banking Strategies for British Capital Markets

The UK is especially exposed given its reliance on gas for electricity pricing, which is why the International Monetary Fund (IMF) has modified its UK inflation and growth forecasts more greatly than any other industrialized economy. Inflation briefly dipped below 3% for the very first time because early 2025, however the reprieve will be short-term.

ANSR July UK PRs

A weaker labour market and softer need should prevent a repeat of 2022's double-digit spike, limiting second-round effects. Our base case is inflation averaging 3.1% in 2026, peaking around 3.5%, before easing to 2.5% in 2027, though threats loom big if the Strait of Hormuz remains closed. The UK labour market was already softening before the most current energy shock, with joblessness rising to 5.0% and jobs at their lowest since the pandemic.

Companies are not yet shedding personnel, but reluctance to work with is widening the space between job development and population growth. Higher energy expenses will compound the pressure, and we expect joblessness to peak at 5.3% by year end. With wage growth slowing to around 3.75% and inflation heading towards 3.5%, genuine pay looks set to be stagnant another hard year for living standards.

ANSR July UK PRs

3 aspects restrict the case for hikes: the energy shock is smaller than in 2022, rates are currently at a limiting level, and a weaker economy lowers the risk of second-round inflation effects. That stated, rate rises can not be eliminated if energy costs rise further. Gilt yields are most likely to stay raised regardless, driven by the UK's inflation sensitivity and political unpredictability around a possible modification of Prime Minister, keeping loaning expenses high throughout the economy even if the policy rate stays on hold.