3 scenarios for the UK in 2026: Bank of England economist

Inflation should continue to slow in, but there are still several risk factors to be aware of heading into 2026.

This is the view of Alan Taylor, a member of the central bank’s nine-strong Monetary Policy Committee, who was speaking at King’s College, Cambridge on Tuesday (14 October).

Most inflation expectation measures remain moderate, he said. “The inflation hump in 2025, while yet to dissipate, should do so in early 2026 when the taxes and administered price hikes from earlier this year roll off.

“Still, I see the upside risks to inflation as low compared to the downward trajectory in output and inflation fundamentals, and this view has led me to dissent in five of the last seven votes on the MPC in favour of a lower path of Bank Rate.”

Taylor said he now sees three plausible scenarios in 2026:

The first scenario is the soft landing. “I saw this as the most likely outcome in January as described in my first speech in Leeds. But the developments I just described mean that this outcome is receding in terms of probability. By maintaining what I think is a too restrictive path of interest rates, we may have braked too hard, such that inflation cannot smoothly return to target with the economy close to potential, as my votes have indicated.”

The second scenario might be called the bumpy landing, one which Taylor views think as increasingly likely, a downside scenario, where inflation undershoots, and goes below target in late 2026, and the economy moves into a weakened state for a sustained period, with output and employment below potential, leading to undue damage to economic activity. “Part of this scenario, in my mind, could end up resulting from some of the trade diversion pressures that I have described today: if we underestimate the forces of trade diversion washing up on our shores in the next year or two, our inflation forecast will miss the mark,” said Taylor.

The third scenario is the hard landing and is a deeper worry, said Taylor. “This was a remote and low-probability event a year ago, but the risk is rising. In this scenario, weak demand at home can lead to a more forceful downturn, where recession dynamics start to kick in that can be very difficult to contain or even reverse. The economy has been flirting with zero growth, and the realisation of negative readings could easily change the future path for the worse. The probability of this outcome is now not trivial. This would be the ‘downside to the downside’ scenario and it would lead to an even more dramatic inflation undershoot than the second scenario. To end up here would be a mistake.”

Taylor said he would be looking carefully at the domestic dynamics, especially in the labour market and wages, as well as output and business sentiment indicators, to see where the country is on these different possible trajectories.

“But I also remain alert to the risk that, as in our long history as an open trading nation, we may also be buffeted by significant shocks from the rest of the world,” he said.