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UK in Focus: Essential economic news for businesses
The latest energy shock points to an undesirable mix of higher inflation and slower growth, but it’s not like 2022, so the policy response will likely differ. The bar to hike rates is high, in our view, but uncertainty is also very high.
An energy shock weakens the outlook and brings greater uncertainty
The Middle East conflict and resulting energy shock has made the UK’s narrow path to recovery in 2026 even narrower. The spike in energy prices in March, damage to energy infrastructure, and effective closure of the Strait of Hormuz, has created a less favourable mix of higher inflation and slower growth. In our base case scenario, the conflict is resolved relatively swiftly, oil prices fall back, inflation peaks at 3.4% in November, and rate cuts are delayed to 2027. However, uncertainty is high and how the conflict evolves will be crucial for the UK economy in 2026 and 2027.
That said, the interest rate policy reaction to the latest energy shock is unlikely to be comparable to that of 2022. Why? The size of the immediate energy shock is smaller, interest rates are already restrictive, widespread fiscal support is unlikely, and the economic backdrop is vastly different. That starting point matters. Unlike 2022, UK economic growth is below potential, unemployment has been rising, wage growth cooling, and price pressures in the broader economy are weaker. Indeed, consumer confidence has been subdued for some time, and the initial reaction in the March survey saw just a 2pt decline, although that may fall further as higher prices begin to pinch and there is less scope to rely on savings to smooth consumption.
Therefore, while we think that the risks to our inflation outlook are to the upside – given the degree of uncertainty and potential for a more protracted conflict than assumed in our base case – the bar for the BoE to hike, in our view, is high. That upside risk is reflected in the recent volatility of financial conditions. But policy makers at the BoE will not want to overreact to an energy shock and place undue pressure on an already weak economy.
Nonetheless, the BoE will be on high alert to signs that inflation pressures spread beyond the mechanical energy uplift, and lead to a de-anchoring of inflation expectations. So far, firms have not reported a significant rise in their own expected price growth and 3-yr CPI expectations remain stable. The prospect of weaker demand may be of greater concern to the services sector. Even if price pressures do begin to rise, limited pricing power may limit the pass through, notwithstanding the strain on margins and subsequently possible weaker investment and employment growth. In our view, unemployment will continue to rise over the next year.
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The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s)is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Emma Wilks.
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The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s)is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Emma Wilks.
Important disclosures
This document has been prepared and is being distributed by the Research Department of HSBC and is intended solely for the clients of HSBC and is not for publication to other persons, whether through the press or by other means.
This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Advice in this document is general and should not be construed as personal advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary, seek professional investment and tax advice.
Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take into account their specific investment objectives, financial situation or particular needs before making a commitment to purchase investment products.
The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative of future results.
HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments, both equity and debt (including derivatives) of companies covered in HSBC Research on a principal or agency basis or act as a market maker or liquidity provider in the securities/instruments mentioned in this report.
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking, sales & trading, and principal trading revenues.
Whether, or in what time frame, an update of this analysis will be published is not determined in advance.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research. HSBC Private Bank clients should contact their Relationship Manager for queries regarding other research reports. In order to find out more about the proprietary models used to produce this report, please contact the authoring analyst.
1 This report is dated as at 8 April 2026.
2 All market data included in this report are dated as at close 7 April 2026, unless a different date and/or a specific time of day is indicated in the report.
3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of
Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses
to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.
4 You are not permitted to use, for reference, any data in this document for the purpose of (i) determining the interest payable, or other sums due, under loan agreements or under other financial contracts or instruments, (ii) determining the price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument, and/or (iii) measuring the performance of a financial instrument or of an investment fund
2 All market data included in this report are dated as at close 7 April 2026, unless a different date and/or a specific time of day is indicated in the report.
3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of
Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses
to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.
4 You are not permitted to use, for reference, any data in this document for the purpose of (i) determining the interest payable, or other sums due, under loan agreements or under other financial contracts or instruments, (ii) determining the price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument, and/or (iii) measuring the performance of a financial instrument or of an investment fund
