Barclays has painted a cautious picture for the UK economy, forecasting growth to slow to 1.2% in 2027 as households continue to feel the pinch from high energy bills and borrowing costs that are expected to stay elevated for longer than many hoped.
The forecast, published in the Institute for Fiscal Studies (IFS) Green Budget, sees real GDP growth easing from 1.4% in 2026 to 1.2% in 2027. The bank attributes the slowdown to consumers having less room to spend, with energy costs remaining high and interest rates still restrictive.
Sticky inflation keeps rates higher
Barclays also expects inflation to remain above the Bank of England's 2% target for the next couple of years, averaging 3.1% in 2026 and 3% in 2027, before finally returning to target in 2028. That 'sticky' inflation outlook is why the bank thinks the Bank of England may deliver two quarter-point rate increases, taking the bank rate to 4.25% by February 2027 from its current 3.75%.
After that peak, Barclays sees the bank rate only gradually easing back to 3.25% over the medium term. That path is notably higher than what markets had been pricing in just a few months ago, reflecting persistent price pressures and a resilient labour market.
For context, the Bank of England has been navigating a tricky balancing act: trying to bring inflation down without tipping the economy into recession. While headline inflation has cooled from its double-digit peaks, services inflation and wage growth have remained stubbornly high, making policymakers cautious about cutting rates too quickly.
What it means for your money
For everyday investors and homeowners, the most immediate impact of Barclays' forecast is likely to be felt in mortgage pricing. Even if the Bank of England holds rates steady for a while, lenders often set fixed-rate mortgages using wholesale funding costs and interest-rate swaps, which reflect where markets think rates and inflation are headed.
So a forecast for a higher peak rate – and a slow drop back to 3.25% – can filter into mortgage pricing well ahead of any actual move to 4.25%. The upshot is that refinancing can stay expensive for longer, while savings rates may stay relatively supported, because expectations about the path of rates do a lot of the heavy lifting.
For those with variable-rate mortgages or loans, the outlook is more straightforward: if the Bank of England does raise rates as Barclays expects, monthly payments would rise. But even if rates stay put, the anticipation of future hikes can keep new fixed deals pricier than they might otherwise be.
For savers, the silver lining is that higher-for-longer rates typically mean better returns on cash deposits, at least in nominal terms. However, with inflation running above 3%, the real value of those savings could still be eroded.
Broader market context
The UK's economic outlook is also being shaped by global forces. Energy prices, which spiked sharply in recent years, remain a key swing factor for household budgets and inflation. Meanwhile, the recent rise in global bond yields has added to the pressure on central banks to keep policy tight.
Barclays' view aligns with a growing consensus that the era of ultra-low interest rates is over, and that economies may have to get used to a higher cost of borrowing. That has implications not just for mortgages, but for corporate borrowing, government debt servicing, and the attractiveness of equities versus bonds.
For investors, the key takeaway is that the UK economy is likely to grow only modestly over the next couple of years, which could weigh on corporate earnings and stock market returns. Sectors sensitive to consumer spending, such as retail and hospitality, may face headwinds, while financials could benefit from wider net interest margins.
It's also worth noting that the gap between the wealthy and those struggling with prices and mortgage rates is widening, a theme that could influence consumer-facing companies' performance.
As always, forecasts are just that – forecasts. The actual path of the economy will depend on a host of factors, including geopolitical developments, energy prices, and how quickly inflation falls. But Barclays' projections serve as a useful reminder that the era of cheap money is firmly in the rearview mirror, and that planning for higher rates for longer may be prudent.
