Soft overseas demand, the past rises in interest rates and higher taxes mean that GDP will grow by only 1.0% in 2026. The weakening in the labour market last year should continue to bear down on wage growth. This and smaller rises in regulated prices this year than in 2025 mean we think CPI inflation will fall below the 2.0% target this year and stay there. That will allow the Bank of England to cut interest rates from 3.75% now to 3.00% this year, rather than to 3.25-3.50% as investors anticipate. That said, if Starmer and/or Reeves are replaced by a top team in favour of higher public spending, then interest rates may not fall as far.
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