The International Monetary Fund has cut its growth forecasts for the United Kingdom while raising its inflation expectations, signaling a more difficult economic path ahead. The shift reflects rising global uncertainty, particularly linked to geopolitical tensions affecting energy prices.
For households, the implications are immediate. Higher inflation and weaker growth are expected to influence interest rates, with direct consequences for mortgage costs and borrowing conditions across the country.
The updated outlook comes as many homeowners prepare to refinance in the coming months, moving away from historically low fixed-rate deals. According to the IMF, the combination of slower growth and persistent inflation could keep financial pressures elevated well into 2026 and beyond.
Slower Growth and Persistent Inflation Reshape Expectations
The IMF now forecasts UK gross domestic product to grow by 0.8% in 2026 and 1.3% in 2027, a downgrade from its January projections of 1.3% and 1.5% respectively. According to the IMF, inflation is also expected to remain above target for longer, averaging 3.2% this year and 2.4% next year.
This outlook reflects rising energy and commodity prices, with petrol costs already up 19% since the start of the conflict involving Iran, while diesel prices have increased by more than a third. According to IMF economic counsellor Pierre-Olivier Gourinchas, the global economic outlook has “abruptly darkened,” with risks tied to disruptions in energy supply.
The labor market is also expected to weaken slightly. Unemployment is projected to rise to 5.6% in 2026, compared with 4.9% last year. In a more severe scenario outlined by the IMF, global growth could fall by 1.3% in 2026, bringing the world economy close to recession.
These developments contribute to a broader environment often described as stagflation, where low growth coincides with high inflation. According to Rachel Springall of Moneyfacts, this dynamic tends to erode household purchasing power as wages struggle to keep pace with rising costs.
Mortgage Rates Likely to Remain Elevated Amid Uncertainty
The economic shift has direct implications for mortgage borrowers. Higher inflation complicates the Bank of England’s ability to reduce interest rates, as its primary mandate remains maintaining inflation at 2%. This could delay expected rate cuts or, in some scenarios, lead to further increases.
Mortgage lenders price fixed-rate products based on expectations of future interest rates. As those expectations adjust upward, borrowing costs have already begun to rise. Around 1.8 million fixed-rate mortgage deals are due to expire in 2026, with many households transitioning from rates near 1.5% to new deals ranging between 4.5% and 6%.
According to Moneyfacts, a typical borrower taking out a mortgage now could pay approximately £1,800 more per year compared with the start of March on a two-year fixed deal. The difference is even more pronounced compared with 2021 levels, with annual repayments around £5,000 higher for similar loans.
Lenders may also respond to economic uncertainty by tightening affordability criteria, making it more difficult for some buyers to secure loans. According to Dr. Pouria Livari of the University of Derby, the effects of rising energy costs extend beyond fuel, influencing transport, food prices, and ultimately borrowing conditions.
