BNP Paribas strategists are forecasting a significant deceleration in UK economic growth, projecting expansion will slow to just 1% in 2026 from 1.3% this year. The French bank warns that escalating conflict in Iran is set to trigger renewed inflationary pressures across the British economy, pushing the headline inflation rate to 3.2%, well above the Bank of England’s 2% target.
This dual threat of stagflation-like conditions—slower growth combined with elevated inflation—complicates the monetary policy outlook considerably. The scenario suggests the Bank of England may be forced to maintain higher interest rates for longer than markets currently anticipate, even as economic momentum weakens. Sterling traders should prepare for increased volatility as the central bank navigates this challenging environment where traditional policy responses become less effective.
The geopolitical dimension adds further uncertainty, with Iran war developments creating unpredictable energy price shocks that could materially impact UK inflation dynamics throughout 2026.
FXnCO Insight
Position for a hawkish Bank of England bias in 2026, with GBP potentially supported by sustained rate differentials despite deteriorating growth fundamentals.
Source: FXStreet