Caterina Batog, Research & Economics Analyst at the British Chambers of Commerce
The Bank of England faces a difficult balancing act: UK growth remains weak, inflation is still above its 2% target, and interest rates remain high. The current situation is different from 2022, when a sharp rise in energy prices after Russia’s invasion of Ukraine drove a surge in inflation and forced the Bank into aggressive rate hikes.
Today, inflation is no longer driven by a single shock. The economy appears more fragile, dominated by persistent cost pressures and heightened global risks, that may sustain inflation over the long term. This makes the Bank’s next decision more difficult to calibrate.
So, which factors should the Bank focus on in its next monetary policy decision?
The latest British Chambers of Commerce (BCC) forecast expects UK growth to remain weak, growing just 1% this year amid ongoing global uncertainty[1]. Inflation is expected to rise to 2.7% this year, largely driven by higher energy prices from the Middle East conflict.
The outlook is highly dependent on how long the conflict continues. NIESR (2026) highlights that if the conflict is not resolved soon, inflation could rise to 5-6% by the end of this year with further increases in 2027[2].
The Bank faces a dilemma: cutting interest rates too soon could cause inflation to spike again, while keeping rates higher for longer risks slowing growth, putting pressure on households and businesses.
The labour market adds another layer of concern. Unemployment is expected to reach 5.5% this year driven by persistent labour costs pressures and the AI risk. Our latest research shows that labour costs remain the top cost pressure for businesses, cited by 73% of firms[3].
Youth unemployment is expected to hit 17% this as higher labour costs make employers less willing to hire new entrants to the workforce.
A medium sized professional services firm in Liverpool has said to the BCC:
“Investment in recruiting younger employees is likely to fall, as they are becoming increasingly expensive due to the rise in the National Minimum Wage and the freeze on the lower National Insurance thresholds.”
Domestic challenges are compounded by global risks. The UK remains highly exposed to global shocks, from uncertainties in US trade policy to geopolitical tensions, which might lead the Bank to tighten its monetary policy in the year ahead.
But what do higher Interest rates really mean for the UK economy?
Higher interest rates may be needed to keep inflation under control, but they also tend to slow economic activity. As borrowing costs rise, households tend to cut back on spending as mortgages and loans become more expensive. Businesses face also higher costs, making them more cautious about investment and hiring.
For UK businesses and households, the message is clear – borrowing is set to get more expensive, and growth is likely to remain weak.
With inflation expected to persistent and global risks showing little sign of easing, tighter monetary policy may be closer than many expect. For the Bank, that leaves 2026 a year to remain cautious.
Further reading:
- BCC’s interest rate response: https://www.britishchambers.org.uk/news/2026/04/bank-facing-interest-rate-dilemma/
- BCC Insights Unit research and publications: https://www.britishchambers.org.uk/insights-unit/publications-and-commentary/
[1] https://www.britishchambers.org.uk/news/2026/03/bcc-economic-forecast-global-turmoil-to-hit-growth-and-push-up-inflation/
[2] https://niesr.ac.uk/blog/inflationary-shock-likely-persist-several-months?utm_content=376148406&utm_medium=social&utm_source=linkedin&hss_channel=lcp-591969
[3] https://www.britishchambers.org.uk/news/2026/03/business-confidence-fragile-going-into-global-turmoil/