In our UK Economic Outlook – December 2025, we look at the potential impacts from the Autumn Budget, as well as the outlook for inflation and interest rates and the implications for UK economic growth in 2026 and beyond.
Download the report for our full analysis. Or read on for a summary.
Headline GDP is expected to slow in 2026, down to just 1% growth, but accelerate in 2027 with projected growth of 1.4%.
Domestic demand is expected to remain weak next year, as a slowing labour market and weak household sentiment is set to keep consumer spending sluggish, with growth of just 1% in 2026.
Table 1: Summary of KPMG’s latest forecasts for the UK economy
UK inflation is expected to gradually moderate as the temporary factors that pushed up the headline rate fade over the coming months. Some of the measures announced in the Autumn Budget could also contribute to the downward momentum in inflation. The energy bill reform package, which will come into effect in April 2026, is expected to see households save around £150 on their energy bills. As a result, we expect the Ofgem energy price cap to fall by around 5% in Q2 2026. Underlying inflationary pressures, as measured by core inflation, are likely to ease more gradually than headline inflation. Overall, we expect inflation to return to its 2% target by April 2026.
Given the more benign inflation outlook, the Bank of England is likely to respond by cutting interest rates at its December meeting. The Bank set a relatively low bar for further rate cuts, with recent evidence from both the labour market and inflation suggesting that this bar has likely been cleared. Furthermore, there is now greater clarity on fiscal policy following the Autumn Budget. We believe this provides sufficient justification for a slim majority on the Monetary Policy Committee (MPC) to vote to lower interest rates, down to 3.75% by December 2025.
The pace of interest rate cuts is likely to slow in 2026. The MPC has signalled that the scope for further cuts is narrowing as interest rates have become less restrictive. As a result, we expect the BoE to cut interest rates only twice in 2026, ending its easing cycle with rates settling at 3.25%.
A persistent weakness in business investment has contributed to sluggish productivity and overall subdued economic growth. While UK business investment has returned to growth since 2022, we have seen the recovery driven almost exclusively by two sectors: information and communication (particularly in the construction of data centres for AI) and more prominently, the energy sector (focusing on renewable generation capacity).
Inflation on course to return to Bank of England target by spring 2026
UK inflation is expected to gradually moderate as the temporary factors that pushed up the headline rate fade over the coming months. Some of the measures announced in the Autumn Budget could also contribute to the downward momentum in inflation. The energy bill reform package, which will come into effect in April 2026, is expected to see households save around £150 on their energy bills. As a result, we expect the Ofgem energy price cap to fall by around 5% in Q2 2026. Underlying inflationary pressures, as measured by core inflation, are likely to ease more gradually than headline inflation. Overall, we expect inflation to return to its 2% target by April 2026.
Bank of England set to cut interest rates in December, but slow the pace of cuts in 2026
Given the more benign inflation outlook, the Bank of England is likely to respond by cutting interest rates at its December meeting. The Bank set a relatively low bar for further rate cuts, with recent evidence from both the labour market and inflation suggesting that this bar has likely been cleared. Furthermore, there is now greater clarity on fiscal policy following the Autumn Budget. We believe this provides sufficient justification for a slim majority on the Monetary Policy Committee (MPC) to vote to lower interest rates, down to 3.75% by December 2025.
The pace of interest rate cuts is likely to slow in 2026. The MPC has signalled that the scope for further cuts is narrowing as interest rates have become less restrictive. As a result, we expect the BoE to cut interest rates only twice in 2026, ending its easing cycle with rates settling at 3.25%.
Business investment constrained by uncertainty, but energy sector driving activity
A persistent weakness in business investment has contributed to sluggish productivity and overall subdued economic growth. While UK business investment has returned to growth since 2022, we have seen the recovery driven almost exclusively by two sectors: information and communication (particularly in the construction of data centres for AI) and more prominently, the energy sector (focusing on renewable generation capacity).
Hear from our global economists on the 17th December on central bank rate changes, fiscal policies, and how evolving geopolitical dynamics could affect your operations, trade strategies, and supply chains.
