While the economy lost all momentum at the end of last year, we still expect GDP growth to accelerate from 0.8% in 2024 to an above-consensus 1.3% in 2025. Admittedly, activity could be restrained if the increase in the government’s borrowing costs due to the recent rise in gilt yields means fiscal policy ends up being tighter than currently planned. But tighter fiscal policy would suggest monetary policy needs to be looser than otherwise. Indeed, we think a fall in CPI inflation to below 2.0% in 2026 will prompt the Bank of England to cut interest rates from 4.75% now to 3.50% by early 2026, rather than to 4.25% as investors anticipate.
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