BNP Paribas forecasts a significant slowdown in UK economic growth for 2026, dropping to just 0.7 percent from an anticipated 1.4 percent this year. The French bank warns that renewed inflation pressures stemming from the Iran conflict will force tighter monetary conditions, with interest rates expected to rise by 50 basis points throughout 2026. This policy tightening is projected to keep 10-year gilt yields elevated in the medium term.
The outlook directly impacts sterling positioning and UK fixed income markets. Traders should prepare for a period of sterling stabilisation supported by higher gilt yields, though the underlying economic weakness presents a mixed picture for currency strength. The combination of slowing growth and persistent inflation creates a challenging stagflationary environment that could limit the Bank of England’s policy flexibility going forward.
FXnCO Insight
Position for range-bound sterling with upside protection in gilts as tighter monetary policy offsets growth concerns, while monitoring Iran tensions for inflation breakout risks.
Source: FXStreet