The Bank of England's latest economic projections show inflation settling at 3% in the first quarter of 2027, while GDP growth slows to near zero. The forecasts, released as part of the Bank's quarterly assessment, indicate that the UK economy faces a prolonged period of above-target price pressures and minimal expansion.
Inflation stays sticky above target
The Bank expects CPI inflation to remain at 3% in Q1 2027, a full percentage point above its 2% target. While inflation has fallen from its recent highs, the forecast suggests that the final leg of the journey back to target will be slow. Persistent services inflation and wage growth are likely keeping price pressures elevated, though the Bank's report does not specify the drivers.
Growth grinds to a near halt
GDP growth is projected to slow to near zero by early 2027. That marks a sharp deceleration from the modest growth seen in recent quarters. The near-zero figure reflects the impact of high interest rates on business investment and consumer spending. The Bank's forecast implies that the economy will be barely expanding, teetering on the edge of stagnation.
A tough balancing act for policymakers
The combination of above-target inflation and near-zero growth presents a classic policy dilemma. The Bank's Monetary Policy Committee must decide whether to keep interest rates high to squeeze out inflation or cut them to support growth. The forecasts suggest that neither problem will resolve quickly, leaving the MPC in a difficult position.
The Bank's projections are based on market expectations for interest rates. If those expectations change, the outlook could shift. The next set of official data on inflation and GDP will be closely watched for signs of whether the Bank's forecasts are on track.
The Bank of England's next policy decision is due in the coming months. Investors and analysts will be parsing the accompanying statement for any hints about the future path of rates.
