The fall in CPI inflation from 2.8% in May to a 14-month low of 2.6% in June suggests there was a lot of disinflation in the system before the start of the Iran war. And the continued weakness in the labour market supports our view that conditions are not conducive of generating meaningful second-round inflation effects. That’s why we think the Bank of England will keep Bank Rate at 3.75% this year and cut it to 3.00% in 2027. With Burnham’s policy ambitions unlikely to be realised in full due to the tight fiscal backdrop, we’re not expecting the government’s policies to reignite growth. But looser fiscal policy relative to current plans would be an upside risk to our both our GDP and interest rate forecasts.
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