UK inflation risks becoming deeply rooted, driven by weak productivity and ongoing wage growth, which is why we predict the Bank of England will keep interest rates steady until at least mid-2026.
And the next move might even be another hike.
The annual inflation rate held steady at 3.8% in September for the third straight month, while core inflation remained close to 3.5%.
As I was quoted by Daily Mail, London Loves Business, London Daily News, and Finance Feeds, amongst other media, the latest inflation figures should sound the alarm, they offer no comfort to policymakers. Instead, they signal that inflationary pressures are proving far more stubborn than anticipated.
The root causes are structural. The UK continues to struggle with weak productivity growth, while wage gains across many sectors still outstrip output.
When wages grow faster than productivity, prices inevitably rise. That’s how inflation stops being a temporary shock and starts becoming a built-in feature of the economy.
Markets are underestimating just how long interest rates are likely to remain elevated.
Why UK inflation is sticking: wages vs productivity
Investors still seem to be pricing in rate cuts over the coming months, a view we believe is misplaced.
The Bank of England simply cannot credibly ease policy while inflation remains nearly twice its 2% target.
The reality is that interest rates are likely to stay at current levels well into 2026, and there’s even a meaningful possibility that the next move could be upward, not downward.
If the Bank of England cuts rates too soon, it risks reigniting inflation and undermining public confidence in its commitment to maintaining price stability.
Inflation expectations would rise, and reversing that shift would be far more difficult. Once credibility is lost, it’s not just tighter monetary policy that’s required, but a full restoration of trust in the Bank’s commitment to price stability.
Furthermore, sluggish growth provides little reassurance.
GDP grew by only 0.1% month-on-month in August, hardly a sign of economic resilience that would encourage the central bank.
It highlights an economy still lacking momentum, yet where inflationary pressures remain. This combination is dangerous: slow growth paired with persistent inflation defines a classic policy trap.
Upcoming fiscal decisions will play a key role in shaping the Bank’s approach.
Why cuts are unlikely before 2026—and a hike is possible
The Autumn Budget could include tax hikes or spending cuts, which would help ease inflation. But if the Chancellor pursues measures that stimulate demand, the central bank will have little choice but to maintain current rates for longer. Fiscal and monetary policy are now engaged in a delicate balancing act.
I believe the UK is nearing a pivotal point for managing long-term inflation.
If inflation becomes entrenched, it risks creating a self-reinforcing cycle. Businesses raise prices, workers demand higher wages, and expectations become embedded. This was the pattern that drove the inflationary stagnation of the 1970s, a situation that took years to reverse and could repeat if not addressed.
Investors, consumers, and policymakers cannot simply assume inflation will return to target on its own.
This assumption has already been proven wrong for months. The real risk now is that the Bank of England acts prematurely, underestimates the stickiness of inflation, and loses control of the economic narrative.
We believe the UK is entering a phase where monetary policy will stay restrictive far longer than widely expected.
The Bank of England is likely to keep rates on hold well into 2026, with a genuine possibility that the next move could be an increase rather than a cut.
To read my previous blog post, click here.