International Market Reports and British Economic Trends

The UK is particularly exposed given its dependence on gas for electrical energy rates, which is why the International Monetary Fund (IMF) has revised its UK inflation and development forecasts more dramatically than any other developed economy. Inflation briefly dipped below 3% for the very first time since early 2025, but the reprieve will be short-term.

ANSR July UK PRs

A weaker labour market and softer need need to prevent a repeat of 2022's double-digit spike, restricting second-round results. Our base case is inflation averaging 3.1% in 2026, peaking around 3.5%, before alleviating to 2.5% in 2027, though dangers loom large if the Strait of Hormuz remains closed. The UK labour market was currently softening before the current energy shock, with joblessness increasing to 5.0% and vacancies at their least expensive since the pandemic.

Firms are not yet shedding personnel, but hesitation to hire is expanding the space between job growth and population growth. Greater 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 tough year for living standards.

ANSR July UK PRs

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