BNP Paribas expects the UK economy to sluggish in 2026, with growth at 0.7% compared to 1.4% in 2025 and renewed inflationary pressures from the Iran conflict. Monetary policy is forecast to tighten by 50 basis points in 2026, keeping the 10-year Treasury yield high. In the case of foreign exchange currencies, the bank expects the GBP/USD rate to stabilize around 1.35 by the fourth quarter of 2026 and by 2027.

The pound is stable against the dollar

“Economic activity is expected to slow in 2026, with growth limited to 0.7% compared to 1.4% in 2025; after the forecast +0.4% q/q in Q1, the average quarterly pace will decline to around +0.1%.”

“This slowdown will occur in the context of renewed inflation pressures caused by the Iran war: inflation will reach 3.6% y/y before gradually declining to 3.3% y/y in 2027, remaining well above the BoE target.”

“In this context, contrary to the initially expected monetary easing scenario, monetary policy will shift towards a tightening by 50 basis points in 2026.”

“The 10-year Treasury yield will remain elevated in 2026 before falling to 4.30% in 2027 as a result of reduced net supply, a decline in the political risk premium and a market that will begin to see BoE interest rate cuts.”

“We expect the yen and GBP to stabilize against the dollar in 2026 (USD 160/JPY and GBP 1.35/USD by Q4 2026) and 2027.”

(This article was created with the facilitate of an artificial intelligence tool and has been reviewed by an editor.)