KPMG warns rising energy prices threaten UK growth and interest rate cuts
Rising energy costs and supply disruptions are putting the UK's economic recovery at risk and keeping inflation above the Bank of England's 2 percent target. Analysts are divided on whether borrowing costs will fall by the end of 2026 or remain steady due to persistent inflation.
Rising energy prices are placing the United Kingdom’s economic recovery at risk, casting doubt on the timing of anticipated interest‑rate cuts and threatening the stability of household finances.
KPMG’s UK Economic Outlook projects gross domestic product to grow by 0.7 percent in 2026. The outlook notes that higher energy prices will push headline inflation up from the third quarter, keeping it above the Bank of England’s 2 percent target and limiting the prospect of near‑term rate cuts.
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Energy shock and the inflation feed‑through
KPMG describes a “sharp increase in oil prices” that has already filtered through to higher pump prices for motorists. The firm warns that the “sharp increase in gas prices” poses a larger upside risk for inflation, likely causing household energy bills to climb from the third quarter onward.
RSM UK adds that the conflict in Iran has driven up oil and gas prices, describing the closure of the Strait of Hormuz as “the largest oil supply shock in history”. Although global oil is currently around $79 per barrel and gas at 100 pence per therm, the report says stocks are being drawn down at a record rate and could reach critical levels by September if a June peace deal proves fragile.
If the disruption proves short‑lived and both oil and gas prices fall before summer, KPMG says inflation could dip from a projected peak in September 2026 and fall close to the Bank’s 2 percent target by the second quarter of 2027.
Monetary‑policy split
The Bank of England kept its policy rate unchanged at its March meeting, signalling that a cut is unlikely in the near term. KPMG argues that the BoE will be “hesitant to cut interest rates until it is confident that headline inflation is on a clear downward path”, citing concerns about “second‑round effects” from higher energy costs.
Nevertheless, KPMG judges that the central bank could lower rates more aggressively than markets expect. It writes that “if the impact of energy supply disruptions fades, a cut later this year appears likely, paving the way for interest rates to fall to 3.5 percent by the end of 2026”.
RSM UK, by contrast, expects the BoE to hold rates at 3.75 percent throughout 2026, noting that “the energy shock is smaller than in 2022” and that “rates are already at a restrictive level”. The report also flags that rate hikes cannot be ruled out if energy prices surge further.
Yahoo Finance relays a KPMG forecast of an additional rate cut by the end of the year, bringing the Bank rate down to 3.25 percent. The article quotes KPMG chief economist Yael Selfin:
She adds that the BoE will “proceed cautiously” but that “slowing economic growth and a weakening jobs market means it is likely to ease borrowing costs before the end of the year”."While the economy showed resilience at the start of the year, the second half looks more uncertain."
Yael Selfin, KPMG UK chief economist, via Yahoo Finance
What to watch
- Whether oil and gas prices retreat before the summer, which KPMG says would allow inflation to fall toward the BoE target.
- Developments on the Strait of Hormuz, which RSM warns could trigger a “significant price surge” and reignite inflation pressures.
- The BoE’s policy meetings later in 2026, where expectations range from a cut to 3.5 percent (KPMG) to a hold at 3.75 percent (RSM) to a cut to 3.25 percent (Yahoo).
Consumer sentiment and labour‑market strain
KPMG’s quarterly Consumer Pulse, based on a survey of 3,000 UK adults, found that six in ten respondents say the economy is getting worse. The same poll shows grocery prices and household utility bills as the top concerns, with 85 percent citing grocery costs and 84 percent pointing to utility bills.
Half of those who think the economy is worsening say they have cut back on spending, and 40 percent report postponing big‑ticket purchases. Yet routine spending remains resilient: 71 percent say price is the main factor shaping everyday buying decisions, prompting a shift toward loyalty schemes and own‑brand products.
RSM UK highlights a softening labour market. Unemployment has risen to 5.0 percent, with vacancies at their lowest since the pandemic, and the 16‑24 unemployment rate has “jumped sharply”. The firm projects unemployment could peak at 5.3 percent by year‑end, while wage growth slows to around 3.75 percent and real pay looks set to be stagnant as inflation heads toward 3.5 percent.
Fiscal pressure and tax outlook
KPMG warns that the Chancellor faces a “tough balancing act” as mounting health and defence spending clash with weaker growth. The firm expects tax rises in the autumn Budget rather than cuts to public‑service spending. It adds that a “gradual ratcheting up of tax revenues over the next decade” may be required to meet spending demands.
Yahoo Finance reports that KPMG foresees another interest‑rate cut during 2026, “breaking away from other economists who have predicted rates will stay the same until 2026”. The same source says KPMG expects the rate to drop to 3.25 percent by year‑end, a deeper cut than market consensus.
Outlook and next steps
All four analysts agree that the energy shock remains the key driver of the UK’s macro outlook. KPMG’s baseline assumes the shock will wane enough for inflation to recede toward the BoE target by early 2027, while RSM cautions that a prolonged closure of the Strait of Hormuz could push inflation back up and trigger a short recession.
Policy makers will therefore be watching three threads closely: the trajectory of oil and gas prices, the labour‑market data that feeds into wage‑growth expectations, and the fiscal decisions emerging from the autumn Budget. The next BoE decision in November will test whether the central bank leans toward KPMG’s more aggressive cut scenario or RSM’s steady‑rate stance.
In sum, the United Kingdom stands at a crossroads where energy‑price volatility, fiscal constraints and divergent monetary‑policy expectations converge. The coming months will reveal whether the economy can sidestep a deeper slowdown or whether the “stagflation‑lite” scenario described by RSM becomes a more entrenched reality.
