The stagflationary effects of the leap in energy prices due to the Iran war mean that we now expect CPI inflation to rise to a peak of around 4.0% later this year, rather than falling below the Bank of England's 2.0% target previously, and real GDP to grow by 0.7% in 2026 compared to 1.0% before the conflict. We think the Bank of England will put equal weight on the rise in inflation and weaker activity and keep interest rates at 3.75% for all of this year. But with the labour market particularly weak, as shown by our proprietary UK labour market indicators, rates could still be cut in 2027, perhaps to 3.00%.