Just over half way through the year and with a new Prime Minister at the helm, it feels like a good moment to assess the economic outlook and how much the prospects have changed since the start of the year. The most notable changes, of course, come from the shift in inflationary expectations and interest rates.
The Iran conflict has significant implications for global supply chains, particularly oil, and therefore there is the risk of higher inflation. So far inflation risk seems relatively well contained given dire initial expectations but forecasts for 2026 are materially higher (now 3.4% v 2.2% at start of year).
While mortgage rates have changed significantly, the Bank of England rate has held steady. Forecasts suggest the Bank of England will continue to hold at 3.75% for the rest of the year but mortgage rates might continue to price in the higher risk environment until the conflict is resolved (current five year rate is 4.7%).
Earnings growth has been slowing but continues to be solid, with a stronger current forecast at mid-year than at the start. This is helping to rebuild household finances a little.
It is clear that many have put their house purchase plans on hold – mortgage approval rates have dipped but underlying demand seems relatively robust awaiting mortgage rates to improve. Potential tax changes under the new PM could halt confidence in the housing market a little further.
House price forecasts for this year are now lower (from 2.7% expected earlier in the year compared to a lower 2.0% now) but still positive. Source: Dataloft by PriceHubble, HM Treasury Consensus Forecasts Dec 2025 and July 2026, Bank of England