Britain’s economic growth is expected to nearly stall for the remainder of the year, according to forecasts from the Bank of England. The central bank projects quarterly growth to slow to 0.1%, following a stronger start to 2026, as rising energy costs, a weakening labor market, and increased mortgage expenses limit consumer spending and confidence.

Inflation, which had eased to 2.6% in June, is anticipated to rise again to around 3.2% later this year, driven in part by ongoing geopolitical tensions in the Middle East. Bank of England Governor Andrew Bailey noted that inflation had declined faster than expected but cautioned that the conflict in the region could prompt a new inflationary surge. He also signaled that economic growth may weaken further as the effects of the conflict continue to dampen demand.

The bank forecasts that unemployment will climb above 5% in the coming months, constraining wage growth as workers face diminished bargaining power amid a softening jobs market. This outlook adds complexity for policymakers, including Mayor Andy Burnham and Chancellor John Healey, who have pledged measures to assist households struggling with living costs.

At the recent Monetary Policy Committee (MPC) meeting, the Bank of England held interest rates steady at 3.75%. Although three of the nine MPC members supported an increase—up from two previously—Bailey dismissed assertions that a rate hike was imminent, emphasizing that there had been no indication from the committee of a shift toward tightening monetary policy.

Deputy Governor Clare Lombardelli described the decision to maintain rates as “pretty clear,” citing subdued inflation in the domestic economy. The bank remains vigilant to the possibility that rising oil, gas, and petrol prices—exacerbated by the conflict involving Iran—could trigger broader inflationary pressures. Bailey highlighted risks stemming from low European gas reserves and reduced global refining capacity but noted that no significant second-round inflation effects were evident so far.

Businesses are reportedly struggling to transfer higher cost burdens to consumers because of weak demand, while wage growth remains modest. Bailey reiterated the bank’s commitment to achieving and maintaining the 2% inflation target and indicated readiness to adjust policy if required.

Following the rate decision, government borrowing costs eased slightly, with two-year yields falling from 4.44% to 4.34%, marking their largest drop in a month. The FTSE 250 index also climbed to a record high, advancing 0.8% to 24,184.10. Despite market expectations of two rate increases within the next year, some analysts remain cautious. Paul Dales of Capital Economics characterized potential hikes as more a threat than a certainty and suggested a possible rate cut to 3% in 2027 if disinflation persists.

Meanwhile, in the United States, long-term borrowing costs reached levels not seen since the 2008 financial crisis amid concerns that the Mid-East conflict could compel the Federal Reserve to raise rates. The 30-year Treasury yield rose to 5.23%, its highest point since 2007, following the Fed’s decision to hold rates steady amid a divided stance among policy makers. The global rise in bond yields and oil prices has supported the US dollar, while the British pound dipped slightly to $1.334.