Heading into 2026, there had been cautious optimism around rate cuts and stronger growth. However, that outlook has weakened in recent weeks. Escalating tensions in the Middle East has driven volatility in global energy markets, pushing oil prices higher and creating renewed inflationary pressure.
Inflation
Inflation was widely expected to stabilise in early 2026, around the Bank of England’s 2% target. However, recent developments have shifted that trajectory. The Bank of England now expects inflation to rise again, with the Consumer Price Index forecasted to sit between 3% and 3.5% in Q2 and Q3 2026.
Rising energy prices, driven by geopolitical tensions, are the primary factor behind this. Increased volatility in global energy markets is likely to keep inflation elevated for longer than previously anticipated.
Economic Growth
The Office for Budget Responsibility forecasts GDP growth of 1.1% for 2026, while the OECD has taken a more pessimistic view, suggesting growth could be as low as 0.7%, marking a downgrade from earlier projections.
There is increasing concern that a combination of; higher oil prices, weakened business investment and softer labour market conditions could push us towards a mild recession later in the year.
Employment
The labour market presents a mixed picture. The National Living Wage has risen to £12.71 per hour, and employment has shown resilience, with an increase of 84,000 workers in early 2026. However, underlying indicators suggest:
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Wage growth has slowed to 3.8%, its lowest rate in over five years
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Unemployment remains at 5.2%, close to a five-year high
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Youth unemployment has risen to 16.0%, with 732,000 young people unemployed
These trends point to increasing pressure on household incomes and consumer confidence.
Mortgage Market
Earlier expectations of Bank of England rate cuts are now less certain, as inflation persists. This is likely to keep mortgage rates higher for longer, continuing to weigh on affordability. Recent data reflects this pressure:
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House prices fell by 0.5% in March 2026, amid uncertainty linked to the Iran conflict
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Mortgage approvals were down 4% year-on-year in February, though slightly up month-on-month
What Does This Mean?
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Borrowers remain highly rate-sensitive, with affordability stretched
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Demand may stay low in the short term
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Product choice and lender criteria will remain critical in securing business
While challenges persist, advisers who stay informed and proactive will be best placed to support clients through a more uncertain and complex lending environment.
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