Oxford Economics sees only two modest rate cuts this year as price pressures persist
UK inflation is set to fall back close to target this spring before edging higher again in the second half of the year, according to Oxford Economics – a trajectory that could limit the scope for Bank of England rate cuts and keep pressure on mortgage pricing.
The global forecasting and economics consultancy projects that headline consumer price inflation will drop to about 2.1% by April 2026. The decline reflects a combination of smaller annual increases in regulated charges, a cut in Ofgem’s energy price cap, weaker food price inflation and temporary policy measures announced in the 2025 Budget.
Oxford Economics expects the new energy cap, due in the second quarter, to drag household gas and electricity bills lower and to push the contribution of energy to CPI inflation into negative territory. Softer increases in items such as water bills and other regulated tariffs, together with slower food price growth as commodity costs ease, are also expected to bear down on the headline rate.
However, the think tank does not expect this respite to last. “We expect inflation will drift up again slightly from H2 2026,” said Edward Allenby (pictured right), senior economist at Oxford Economics.
“Sticky pay growth is likely to prevent services inflation from returning to a target-consistent pace. Meanwhile, the drag on inflation in H1 from temporary Budget measures, including the decisions to remove some energy levies from household bills and to freeze rail fares, is likely to slowly unwind over time.”
Oxford Economics argues that wage growth remains too robust to be fully consistent with the Bank of England’s 2% inflation target. Survey evidence from firms and the central bank’s own liaison work points to pay settlements that are likely to stay above the level the Bank associates with medium‑term price stability. As a result, underlying services inflation is expected to cool only gradually rather than return decisively to target‑compatible rates.
At the same time, some of the one‑off factors holding inflation down in early 2026 are expected to reverse. The temporary removal of certain energy levies from household bills, and the freeze in regulated rail fares, are both due to unwind, while fuel duty is scheduled to rise later in the year. Base effects in core goods are also likely to push the annual rate higher towards the end of 2026.
On this basis, Oxford Economics expects inflation to settle a little above 2% through the second half of 2026 and into 2027, rather than remaining anchored at target. But even with inflation dropping back, slower nominal wage growth is expected to curb gains in real earnings, while higher tax and national insurance payments weigh further on disposable income.
Consumer spending growth is therefore forecast to remain modest, at around 1% a year over 2026 and 2027. That points to below‑trend GDP growth over the forecast horizon, leaving the Monetary Policy Committee (MPC) balancing lacklustre activity against inflation that is still slightly above target.
Oxford Economics believes this trade‑off will keep the Bank of England cautious. The MPC is already divided over the pace of easing, and the consultancy expects that lingering price pressures will persuade more hawkish members to resist rapid cuts in Bank Rate. Its central projection is for only two 25‑basis‑point reductions in 2026, one in the spring and another towards the end of the year, which would take Bank Rate to around 3.25% by December.
For lenders and intermediaries, a shallow path for rate cuts implies that funding costs and swap rates may remain relatively elevated compared with pre‑pandemic norms. The expectation of inflation running slightly above target, together with sticky wage dynamics, could also keep longer‑dated gilt yields from falling sharply, limiting scope for substantial reductions in longer‑term fixed mortgage rates.
At the same time, the expected easing in headline inflation over the coming months may support borrower affordability tests and improve sentiment among homebuyers, even if interest rates decline only gradually.
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