JP Morgan Cuts UK Economic Outlook, Bank of England Rate Cut Delayed to 2027

Investing.com - JPMorgan revised its UK economic forecast on Tuesday, citing rising energy prices. The bank now expects the Bank of England to delay interest rate cuts until the first quarter of 2027.

The bank assumes oil prices will stay around $100 per barrel until the end of April, then gradually decline to $75 by the end of the year. Based on the near-term futures curve, natural gas prices are expected to average close to €45 per megawatt-hour in 2026.

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JPMorgan now forecasts the UK’s inflation rate for the second half of 2026 to average 2.9%, up from the previous estimate of 2.2%. The bank estimates that by the third quarter of this year, direct impacts on overall inflation will reach 0.6%, with increases in gasoline and diesel prices contributing 0.2% to 0.3%, and household energy bills adding 0.3% to 0.4%.

Core inflation is expected to lag and rise through transportation services and core goods, as rising oil prices impact airline and manufacturing costs. This adds an additional 0.2 percentage points to overall inflation. By the fourth quarter of 2026, JPMorgan expects the overall inflation rate to be 2.9%, higher than the previous forecast of 2.2%, with core inflation rising from 2.5% to 2.7%.

The mechanism for regulated household energy bills in the UK has delayed the transmission of market price changes. Bills are planned to decrease by 6% in April but will start rising again from July, roughly four months after the Iran attack began. Current forecasts from EDF, British Gas, and EON regarding Ofgem price caps indicate prices will rise over 10% in July and remain high next year.

JPMorgan has lowered its year-end GDP forecast by 0.3%, now expecting an average annualized growth rate of 0.8% in 2026. The bank assumes households will absorb half of their real income shocks. The unemployment rate is now expected to reach 5.6% by the end of the year, up from the previous forecast of 5.5% in Q2 2026.

The bank anticipates the Bank of England will enter a prolonged pause, abandoning its previous easing plans. JPMorgan previously expected a 50 basis point rate cut by June. Now, it assumes the next rate cut will not occur until the first quarter of 2027, when the Bank of England will be able to assess how another year of high inflation affects wage setting.

JPMorgan expects the Bank of England to acknowledge at Thursday’s meeting that interest rates remain restrictive and to retain a mild easing bias, but the prospect of further easing may be removed from the near-term agenda. The bank expects the guidance statement to show a hawkish adjustment.

This forecast assumes limited fiscal support from the government for higher energy prices. JPMorgan expects any interventions to target vulnerable households rather than aim to keep inflation low, allowing overall inflation to run between 2.5% and 3.0% in the second half of 2026.

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