The worst-case scenario for the UK over the next year: Barclays

Barclays expects UK interest rates to average 4.3% next year, up from 3.8% in 2026. The bank set out the forecast in its third-quarter results, as part of the economic scenarios it uses to decide how much to set aside for bad loans.

Barclays said its central scenario reflects the latest consensus economic forecasts available. Barclays expects UK inflation to end 2026 at 3.2%, before easing to 2.1% by the end of 2027 and 1.4% by the end of 2028.

The bank said tariff pass-through, higher energy prices, supply chain frictions and rising transport costs would keep price pressures elevated. UK unemployment averages 5.1% in both 2026 and 2027 under the central forecast, peaking at 5.2%.

Barclays said the labour market would soften gradually, but not quickly enough to ease underlying price pressures. The bank expects the UK economy to grow 1.3% this year and 1.2% in 2027.

UK house prices rise 1.6% this year and 2% next year in the central scenario, before picking up to 3.2% in 2028. Barclays has upgraded its UK outlook since the end of June.

At that point, the bank expected UK growth of just 0.4% this year and unemployment of 5.3%. It also expected interest rates to average 4.1% this year and 4.4% in 2027.

At the end of 2025, Barclays expected UK interest rates to average 3.4% in both 2026 and 2027. Barclays increased the weighting it gives to its more optimistic scenarios, citing an improved growth outlook for the UK and US.

Worst case scenario

In its most severe scenario, which Barclays weights at 6.9%, a prolonged Middle East conflict disrupts shipping routes and sends oil and gas prices sharply higher.

UK GDP falls 3.9% in 2027 under that scenario, while unemployment peaks at 8.1% and house prices drop 25.4%. Inflation reaches 6.7% by the end of 2027, with interest rates averaging 5.1%.

Barclays said central banks would initially raise rates to keep inflation in check, before shifting towards cuts as the downturn deepened.

The bank’s milder downside scenario has UK GDP shrinking 1.3% in 2027, unemployment averaging 6.4% and house prices falling 12.4%.

Best case scenario

Under its strongest scenario, UK growth reaches 3.5% in 2027, house prices rise 14% and inflation falls to 1.2%. Interest rates average 3.8% next year in that scenario, with unemployment at 4.5%.

Barclays said higher labour force participation and productivity would drive the stronger growth without adding to inflation.

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