Fitch Affirms UK Rating: BoE Expected to Maintain Tight Stance Throughout 2026

International rating agency Fitch Ratings has affirmed the United Kingdom's long-term foreign-currency issuer default rating at "AA-" with a "stable" outlook, presenting a cautious yet steady economic trajectory under the newly formed government of Prime Minister Andy Burnham.

Fiscal Discipline Under the Shadow of Political Transition

Following a decade marked by six prime ministerial changes, the transition to Burnham's leadership is projected to bring relative political stability for the remainder of the legislative term. While Fitch anticipates no near-term disruptions to fiscal rules or macroeconomic policy frameworks, it warns that fiscal uncertainty could intensify as the next general election approaches.

Structural Headwinds and Migration Risks in the Growth Path

The UK economy continues to grapple with high energy costs and tight financing conditions, pointing toward a low-gear recovery phase. Fitch's growth projections highlight key structural bottlenecks:

■Real GDP growth is forecasted at 0.9% in 2026 and 1.2% in 2027.

■Although growth is expected to edge up to 1.4% in 2028, this rate remains nearly half of the 2.9% average growth rate of "AA"-rated peers.

■Upside risks include faster public investment, AI adoption, and deeper EU trade integration, while declining net migration driven by tighter visa rules poses a significant downside risk to labor supply and growth.

BoE's Inflation Path and Interest Rate Trajectory

On the inflation front, consumer price growth is expected to rise from 2.6% in June to 3.7% by year-end. Fitch outlines a clear trajectory for the Bank of England's (BoE) monetary policy response:

■The BoE is expected to hold its policy rate steady at 3.75% throughout 2026.

■As inflation gradually retreats to the 2.0% target by the end of 2028, the central bank is projected to initiate rate cuts toward a neutral rate of 3.0%.

Fitch's affirmation underscores the structural vulnerabilities of the UK economy and the narrow path ahead for the Bank of England. The projected rebound of inflation to 3.7% by year-end explains why the BoE must maintain a relatively hawkish undertone. Keeping the policy rate unchanged at 3.75% throughout 2026 reflects a cautious strategy to preserve monetary credibility and prevent premature easing. However, sustaining such a restrictive stance amid growth rates that are half of its peer average risks inducing stagflationary pressures. The synchronization between Burnham's fiscal policy and the BoE's monetary tightening will be the ultimate test for the UK's "AA-" rating stability.