NIESR cuts UK 2026 GDP forecast to 0.9% from 1.4%, sees inflation peaking above 4% in 2027 and warns of recession risk if the Iran war worsens. BoE seen hiking once to 4% in July. Its 2027 forecast was trimmed to 1.0% from 1.3%. The institute attributed the deterioration directly to the surge in oil and gas prices triggered by the Middle East conflict, which it said has exposed a structural vulnerability in the British economy.
On inflation, the picture is troubling. NIESR expects price growth to accelerate from 3.3% currently to 4.1% at the start of 2027, a level that would represent a significant setback for the Bank of England’s efforts to return inflation to its 2% target. That target is not seen being met until 2028. Director David Aikman said the conflict had laid bare the fact that the UK remains highly exposed to global energy shocks, a pointed observation given that Britain has endured the highest inflation rate of any advanced economy for much of the past four years.
The labour market is expected to weaken in tandem, with unemployment projected to peak at 5.5% in the fourth quarter of 2026 and wage growth slowing to 3.3% in 2027 as hiring cools.
NIESR’s base case for monetary policy is a single 25 basis point rate rise in July, taking Bank Rate to 4% from its current 3.75%. That is a notably more cautious view than financial markets, which on Tuesday were pricing in two to three increases by the end of the year. The Bank of England is due to publish its own updated forecasts on Thursday alongside what is widely expected to be a decision to hold rates.
The institute was direct about the risks if the conflict worsens. In an adverse scenario involving a prolonged war and further oil price rises, NIESR warned there was a high likelihood of Britain entering recession in the second half of the year. Under that scenario, the BoE could be forced to raise rates by 150 basis points in total, equivalent to six quarter-point moves, taking Bank Rate to 5.25%. That would represent an aggressive tightening cycle with severe consequences for mortgage holders and economic activity.
On the fiscal side, NIESR issued a warning to Chancellor Rachel Reeves, who is already under pressure to support households facing rising living costs. The think tank said she would need to run primary budget surpluses to bring Britain’s debt trajectory under control, a degree of fiscal discipline the country last achieved in 2001 and one that sits uneasily alongside any ambitions to cushion the economic blow from the energy shock.
Bank of England meet Thursday April 30
