British Pound: Stabilisation expected with higher gilts – BNP Paribas

§ 01 Executive Snapshot

• What: BNP Paribas forecasts a stabilization of the British Pound (GBP) against the US Dollar (USD) by late 2026.
• Who: BNP Paribas, UK economy, Bank of England (BoE).
• Why it matters: The analysis highlights potential economic slowdowns and monetary policy shifts affecting currency stability and inflation in the UK.

§ 02 Key Developments

• Economic growth in the UK is projected to slow to 0.7% in 2026, down from 1.4% in 2025.
• Inflation is expected to reach 3.6% year-on-year in 2026, easing gradually to 3.3% in 2027, remaining above the BoE's target.
• A monetary policy tightening of 50 basis points is anticipated in 2026, contrary to previous easing expectations.
• 10-year gilt yields are expected to remain elevated in 2026 before declining to 4.30% in 2027 due to reduced net supply and lower political risk.
• GBP/USD is forecasted to stabilize around 1.35 by Q4 2026 and continue through 2027.

§ 03 Strategic Context

• The forecasts reflect ongoing geopolitical tensions, particularly the Iran conflict, which are influencing inflation and economic stability in the UK.
• The shifting monetary policy landscape indicates a response to unanticipated inflation pressures, diverging from previous easing expectations.

§ 04 Strategic Implications

• The tightening of monetary policy could lead to higher borrowing costs, impacting consumer spending and economic growth in the near term.
• Stabilization of the GBP against the USD may offer some predictability for international trade and investment but could also reflect underlying economic challenges.

§ 05 Risks & Constraints

• The forecast relies on uncertain geopolitical developments, particularly regarding the Iran conflict, which could further influence inflation and economic stability.
• Potential risks include the Bank of England's response to inflation and growth dynamics, which could shift if economic conditions change unexpectedly.

§ 06 Watchlist / Forward Signals

• Key indicators to monitor include actual inflation rates, GDP growth figures, and any announcements from the Bank of England regarding interest rate changes in 2026.
• The stabilization levels of GBP/USD and 10-year gilt yields will be critical for assessing the effectiveness of the anticipated monetary policy adjustments.