Fall in inflation to 2.0% in 2027 to trigger rate cuts

We doubt the Bank of England will follow in the footsteps of some other central banks by raising interest rates. In fact, our economic forecasts are consistent with it cutting rates from 3.75% to 3.00% next year. That’s in contrast to investors’ expectations that interest rates will be 4.00% at the end of 2027. Admittedly, the full inflationary impact of the war in Iran has yet to be felt. CPI inflation may rise from 2.8% in May to about 3.5% around the turn of the year. But we have revised down that forecast from 4.3% to reflect the latest falls in energy prices. And a further weakening in the labour market and GDP growth will prevent wage growth from accelerating and profits margins from rising. Without these second-round effects, CPI inflation will fall to 2.0% next year and possibly below 2.0% in 2028.