Bad news for UK unemployment and interest rates, warns Lloyds
Key Points
- Lloyds Bank forecasts UK unemployment will climb to 5.6% by the fourth quarter of 2026, up from 5.3% in the first quarter.
- The bank expects unemployment to peak at 5.6% in Q3 and Q4 2026 before easing to 5.2% by the end of 2027.
- UK Bank Rate cuts have been pushed back to 2027 as Middle East conflict drives energy prices and reignites inflation.
- CPI inflation is forecast to climb from 3.2% in Q1 2026 to 3.9% by year end before falling back below target in late 2027.
- Lloyds posted Q1 2026 profits of £1.625 billion, up 38% on the prior year, as impairments stayed low at £292 million.
Lloyds Bank has warned that UK unemployment will rise from 5.3% in the first quarter of 2026 to 5.6% by the end of the year.
The bank is also pushing back its forecast for interest rate cuts to 2027 as the Middle East conflict reignites inflationary pressures across the British economy.
The forecast, published in the bank’s Q1 2026 Interim Management Statement on Wednesday (29 April), sits alongside a downgraded outlook for GDP growth and house prices, painting a picture of stagflation that will squeeze households and weigh on the labour market through 2026.
The base case scenario shows unemployment climbing through every quarter of 2026, holding at 5.6% across the third and fourth quarters before gradually easing to 5.2% by the end of 2027.
On an annual average basis, Lloyds expects unemployment of 5.5% in 2026 and 5.4% in 2027, before a recovery to 5.0% in 2028 and 4.5% by 2030.
The probability-weighted scenario, which blends optimistic and pessimistic outcomes, is gloomier still and projects average unemployment of 6.1% in 2027.
Rate cuts pushed back to 2027
The Bank of England’s base rate is now expected to remain at 3.75% throughout 2026, with Lloyds anticipating the first cut will not arrive until the third quarter of 2027, when the rate is forecast to drop to 3.50%.
This represents a material shift from the December 2025 outlook and reflects what Lloyds describes as the stagflationary consequences of the Middle East conflict.
Energy price increases are expected to drive a re-emergence of inflationary pressures, with CPI inflation rising from 3.2% in Q1 2026 to 3.9% in the fourth quarter before falling back to 1.8% by the end of 2027.
Mortgage holders hoping for relief face a longer wait than previously expected, while savers will continue to benefit from elevated returns on cash deposits, though Lloyds itself has pulled back from parts of the fixed term deposit market.
Base case scenario quarterly forecasts
| Quarter | Unemployment | UK Bank Rate | CPI inflation | GDP growth | Notes |
|---|---|---|---|---|---|
| Q1 2026 | 5.3% | 3.75% | 3.2% | 0.2% | Starting point for the forecast period |
| Q2 2026 | 5.5% | 3.75% | 3.1% | 0.2% | Unemployment begins climbing |
| Q3 2026 | 5.6% | 3.75% | 3.5% | 0.1% | Inflation accelerates, GDP near stalling |
| Q4 2026 | 5.6% | 3.75% | 3.9% | 0.3% | Peak inflation expected |
| Q1 2027 | 5.5% | 3.75% | 3.5% | 0.4% | Unemployment begins easing |
| Q2 2027 | 5.5% | 3.75% | 3.1% | 0.4% | Inflation moderating |
| Q3 2027 | 5.3% | 3.75% | 2.1% | 0.4% | First rate cut expected |
| Q4 2027 | 5.2% | 3.50% | 1.8% | 0.4% | Inflation below target |
Downside scenarios point to deeper pain
The bank’s alternative scenarios reveal how much worse conditions could get if risks materialise.
In the downside scenario, unemployment averages 7.8% in 2027 and 7.7% in 2028, while house prices fall 5.8% in 2028 alone.
The severe downside scenario, used for stress testing, projects unemployment averaging 10.5% in 2027 and house prices crashing 12.6% in 2028.
Under that scenario, Bank Rate would be slashed to near zero by 2030 as the central bank fights to support a contracting economy.
These alternative scenarios feed directly into how Lloyds calculates expected credit losses on its loan book, which totalled £468.5 billion at the end of March.
The probability-weighted approach blends the four scenarios to produce a single forecast, and on that basis unemployment averages 5.7% across 2026 and 6.1% across 2027.
Lloyds is in good health
Despite the gloomier macroeconomic backdrop, Lloyds Bank reported a strong start to 2026 with profit before tax of £1.625 billion in the first quarter, up 38% on the £1.177 billion recorded in the same period of 2025.
Total income rose 9% to £4.757 billion, driven by an 8% increase in net interest income to £3.490 billion as the bank reinvested its structural hedge into higher rates.
The impairment charge fell to £292 million from £310 million a year earlier, with the bank citing strong and stable credit performance across its portfolios.
The Group’s common equity tier 1 capital ratio held steady at 13.6% and the UK leverage ratio remained at 5.2%, indicating the bank has substantial capacity to absorb losses if the downside scenarios materialise.
Risk-weighted assets grew £4.1 billion to £198.4 billion, reflecting strong customer lending growth, with mortgages up £1.6 billion and Commercial Banking lending up £1.9 billion in the quarter.
