Investing.com -- Bank of America (NYSE:BAC) (BofA) on Tuesday revised its U.K. economic growth forecasts downward for the years 2025 and 2026, attributing the change to the impact of tariffs imposed by the United States and other economic headwinds.
The bank now expects U.K. growth to reach 1.1% in 2025 and 1.3% in 2026, a decrease from its previous estimates of 1.4% for both years.
BofA cites the 10% tariff on U.K. imports, a 25% tariff on autos with some exemptions, and no significant retaliation from the U.K. as contributing factors.
Additionally, high trade uncertainty, weakened confidence in anticipation of the tariffs and National Insurance Contributions (NICs) rise, coupled with softer global growth, were highlighted as reasons for the downgrade.
Despite the downward revision starting from the second quarter, BofA still anticipates quarterly growth to remain positive.
This expectation is supported by the fiscal stimulus introduced in October and a projected pickup in consumer spending, which are believed to act as tailwinds for the economy.
However, the bank expresses skepticism regarding the ability of fiscal policy to significantly mitigate the shock, pointing out that the U.K.’s fiscal headroom is small and could be further eroded by weaker growth and higher yields.
BofA suggests that unless fiscal rules are altered, a scenario they see as unlikely, fiscal consolidation measures may be announced in the Autumn, potentially adding to growth risks later in the year.
Inflation risks are expected to be lower following the tariffs, according to BofA’s analysis. The bank predicts that lower growth, a softening labor market, the potential disinflationary impact of tariffs, lower oil and gas prices, and recent declines in services inflation could all contribute to reducing inflation risks.
As a result, BofA has cut its headline inflation forecasts to 2.9% in 2025 and 2.1% in 2026, with a slight reduction in the expected inflation peak from 3.5% in Q3 to 3.2% in Q2/Q3.
Regarding monetary policy, BofA anticipates that the Bank of England (BoE) will implement rate cuts more rapidly than previously expected due to the weaker growth outlook and lower inflation risks.
The bank now forecasts that the BoE will reduce rates to a terminal rate of 3.5% by the end of 2025, adjusting its prediction from 3.75%.
BofA expects four rate cuts in 2025, with an additional cut in September, and no cuts in 2026, although it acknowledges the possibility of further reductions and a lower terminal rate of 3.25%.
Finally, BofA warns that growth risks are skewed to the downside. It cautions that the potential return of reciprocal tariffs on April 2 and U.K. retaliation could exacerbate the downside risks to both global and U.K. growth.
In such a scenario, U.K. growth might approach zero in some quarters, raising the possibility of a minor contraction and compelling the BoE to consider rate cuts closer to 3.0%.