BofA Trims 2027 UK Growth Forecast on Energy Price Shock

Bank of America Securities has trimmed its 2027 growth forecast for the United Kingdom, citing the economic drag from higher energy prices and uncertainty ahead of the government's Autumn Budget. Economists at the bank now project the UK economy will expand by 1.2% in 2027, a reduction of 10 basis points from their previous estimate.

Revised Economic Outlook

In a research note, BofA economists Sonali Punhani and Ruben Segura-Cayuela detailed several adjustments to their UK economic forecasts. They noted that growth is likely to slow more than previously expected in the coming months due to persistent energy price pressures.

Key forecast changes include:

• 2027 GDP Growth: Cut by 10 basis points to 1.2%.
• 2026 GDP Growth: Raised by 10 basis points to 1.2%, reflecting stronger-than-expected performance in the first half of the year.
• 2028 GDP Growth: Unchanged at 1.5%.

Despite the near-term headwinds, BofA acknowledged that risks to its growth forecasts are tilted to the upside. This is partly due to resilient sentiment data, such as stronger-than-expected Purchasing Managers' Index (PMI) readings in August, and the potential for fiscal loosening in the Autumn Budget.

Inflation and Rate Path

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The energy price shock also prompted BofA to raise its inflation projections. The bank now expects headline inflation to peak at 3.5% in November 2026 and remain above 3% until the second quarter of 2027.

The forecast for Q4 2026 inflation was lifted by 20 basis points to 3.4%, while the 2027 forecast saw a sharper 30-basis-point increase to 2.6%. Core inflation forecasts were raised more modestly. Despite these revisions, BofA maintained its call for the Bank of England to keep interest rates on hold through 2026, followed by a single 25-basis-point cut in November 2027 to 3.5%.

Broader Context

The analysts described the outlook for a potential Bank of England rate hike as a "close call" due to the stickier inflation profile. While they believe the bar for a September rate hike is very high, they consider the November, December, and February meetings to be "live."

This economic recalibration occurs as the UK labour market shows signs of softening. According to BofA, unemployment stands at 4.9% amid a drop in payrolls and vacancies. The bank expects the unemployment rate to continue rising, peaking at around 5.2% in mid-2027.