The United Kingdom enters 2027 with expensive borrowing and weak growth

In its July forecast, the regulator kept the base rate at 3.75%, while three of the nine members of the Monetary Policy Committee voted to raise it to 4%. In the Bank of England’s central scenario, inflation will accelerate to around 3.2% at the end of 2026, then fall to 2.6% by the third quarter of 2027. At the same time, the market-implied path built into the forecast assumes a rate of around 4.2% in mid-2027.

Higher energy prices have been the main source of persistent inflationary pressure. The Bank of England notes that their effects are gradually spreading to the cost of food, goods and services. Meanwhile, economic growth remains weak. According to the regulator’s forecast, the UK’s real GDP will grow by around 1.1% in 2026 and by the same amount in 2027. Household consumption may rise by just 0.8% next year, while the unemployment rate is projected to reach 5.3% by the third quarter of 2027. Recent data point to a mixed picture. In August, annual inflation in the UK rose to 3.1%, up from 2.9% a month earlier. Core inflation, however, remained at 2.6%, while services price growth was relatively moderate. The Financial Times notes that the acceleration so far is mainly linked to energy factors, while the labour market is gradually cooling. The number of employees on payrolls fell, vacancies declined to their lowest level in many years, and private-sector wage growth slowed. (Sources: Bank of England, 30 July 2026; Financial Times, 15 and 16 September 2026).

This combination creates particularly difficult conditions for the UK economy. High inflation limits the scope for rapid rate cuts, while weak growth and a deteriorating labour market leave less room for further policy tightening. As a result, the UK could face 2027 with high borrowing costs and fairly subdued economic activity.

A gradual easing of inflationary pressure as the energy shock subsides appears most likely. Even so, demand is likely to recover slowly, as high interest rates are already affecting the cost of mortgages and corporate loans, as well as investment decisions. More persistent price growth could prolong this period and increase the risk that weak consumption will continue for longer than current forecasts suggest. The key factor for the UK economy will be how quickly the energy shock stops feeding through to domestic prices.

Author: Assistant, Department of World Economy and International Finance, Financial University under the Government of the Russian Federation Nikita Dmitrievich Klevanets.