Flat house prices, rising inflation and no rate cuts: What one top UK lender is planning for
Key Points
- Shawbrook's central forecast has UK house prices flat across 2026 and the bank rate held at 3.75%.
- The lender expects inflation to peak at 3.5% on the back of July's 15% energy price cap rise.
- Unemployment is forecast to reach 5.6% this year.
- Every headline forecast has worsened since the bank's December projections.
- Its severe downside scenario models house price falls of 4.6% in 2026 and 13.6% in 2027.
Shawbrook Group expects UK house prices to end 2026 exactly where they started, with inflation peaking at 3.5% and the Bank of England holding rates for the rest of the year.
The London-listed lender published the economic scenarios behind its lending decisions in its interim financial report on Tuesday (4 August).
Banks build these forecasts to work out how much money to set aside for loans that may go bad, and they carry weight because lenders act on them when pricing mortgages and deciding who to lend to.
Shawbrook attaches a 50% probability to its central view and a combined 40% probability to its two downside cases.
Its base case for the UK economy is as follows:
- House prices: No change across 2026, then growth of 1.7% in 2027 and 2.8% in 2028
- Bank rate: 3.75% for the remainder of 2026, falling to 3.25% in 2027
- Inflation: 3.5% in 2026, returning to 2.0% from 2027
- Unemployment: 5.6% in 2026, easing to 5.3% the following year
- Economic growth: 1% in 2026, rising to 1.3% in 2027
Every one of those figures has moved against households since Shawbrook last published the numbers in December.
At that point the bank pencilled in house price growth of 0.6% for 2026, inflation of 2.0%, unemployment of 5.1% and a bank rate of 3.25%.
The lender attributes the change to the 15% energy price cap increase that took effect in July, which it expects to lift inflation through the second half of the year, and to a labour market showing more signs of weakness.
It also notes that the economy grew 0.7% in May, following growth of 0.8% in the three months to April.
Downside scenarios
The downside scenarios are noticeably worse. Shawbrook’s moderate downside has house prices falling 3.0% this year and 8.7% next, while its severe downside models a 4.6% fall followed by a 13.6% drop in 2027, with the bank rate rising to 5.25% and unemployment reaching 8%.
The lender flags escalation in the Middle East, second-round inflation effects that force rate rises, and fiscal tightening at the Autumn Budget as the main risks.
It also warns that arrears could climb among borrowers rolling off cheap fixed rates, though its own arrears rate held steady at 1.7% over the first half.
