MNI INTERVIEW: UK Growth Seen Lower, But Rates On Hold - CBI

UK economic growth is likely to be slower than previously expected over the next two years as the impact of the Iran conflict adds to uncertainty for both businesses and consumers, a leading British business lobby group told MNI.

The Confederation of British Industry (CBI) now sees growth in 2026 at 1.1% and 0.9% in 2027, down from its previous projections of 1.3% and 1.5% respectively, with the downgrade primarily reflecting the economic fallout from higher global energy prices and disrupted supply chains, group Chief Economist Louise Hellem said in an interview.

“What’s happening around the world is compounding the UK’s low-growth story. We saw weak momentum throughout 2025, but if it weren’t for the latest global shocks, we could be having a much more positive conversation about the economy today," Hellem said as the CBI published its economic forecasts.

“Last year it was tariffs and this year it’s the conflict in the Middle East. The reality is that a world of elevated uncertainty and volatility is no longer the exception, it’s the norm – the backdrop against which businesses must operate," she added.

PRICE PRESSURES

Added price pressures should push inflation close to 4% by year end, according to Hellem, driven primarily by the fuel and household energy costs, alongside energy-intensive goods and services. It should then gradually slow over 2027, albeit remaining above the Bank of England’s 2% target, and averaging 3.6% over Q4 2026, the CBI's Economic Outlook shows.

While inflationary pressures should be less severe than those experienced during the 2022 energy crisis, higher living costs will erode growth in household incomes and keep consumer confidence muted, Hellem added.

Consumption will face headwinds from gloomy sentiment, a loosening labour market, and moderating wage growth. "Our forecast anticipates that the savings ratio will remain historically elevated, as cautious households limit their drawdowns," Hellem said. (See MNI INTERVIEW: UK Consumers Nervy As Conflict Extends - GfK )

"While some households may draw down on savings to support consumption during the current energy shock, the projected decline in the savings ratio (to 8.8%) is not of the
same magnitude as in 2022. A larger reduction in savings than assumed would, all else equal, represent an upside risk to our consumption forecast," she added.

RATES UNCHANGED

Despite the higher inflation outlook, the CBI does not see the Bank of England raising rates through 2027, Hellem said. Bank Rate should remain unchanged at 3.75% as "policymakers balance inflation risks arising from the current energy shock against weak economic growth and a cooling labour market."

While the CBI sees risks to the forecast are skewed to the upside in the near-term, "the bar to raising rates is relatively high as the economy is currently operating with a considerable margin of slack," she said.  (See MNI: Financial Tightening Complicates BOE Hike Calculations )

With unemployment already at 5.0%, the CBI expects the labour market to weaken further over the coming year, with joblessness rising to 5.5% in late 2026 and early 2027, further weighing on real wage earnings despite higher inflation pushing up average nominal wages by around 0.5% y/y.

FISCAL OUTLOOK

Public sector net borrowing is forecast to fall to GBP90 billion in 2027/28, around GBP31 billion below the CBI's December forecast, largely on the back of a smaller deficit and lower public sector net investment. Government revenues should be higher than in the previous forecast, partly because of upwardly revised wage growth projections.

"The current budget deficit -- one of the Chancellor’s key fiscal target measures -- is expected to decline from GBP47 billion in 2025/26 to GBP3 billion by 2027/28," Hallem said.