2025 has been a mixed bag for markets. From the unpredictability of Trump’s tariffs to the effects of continuing global conflict and upcoming domestic Budget changes, the economy has been hard to predict.

And yet, as a new year approaches, financial experts across the sector – not to mention large organisations such as the Bank of England (BoE) – will look to make forecasts for the year ahead.

UK growth, unemployment, inflation, and interest rates will all shift over the next 12 months, with a knock-on for your finances.

But remember, where your long-term plans are concerned, the important thing is to stay calm and focus on your end goal.

At de Mellow & Co, we can help you do just that.

Inflation is likely to remain above the Bank of England’s target

Simply put, inflation measures the annual percentage increase in the price of goods and services.

While the BoE’s target is to maintain inflation at 2%, this isn’t always possible. During the fallout from the Covid pandemic, for example, inflation rose rapidly, reaching a 41-year high of 11.1% in October 2022. This sparked a cost of living crisis that many argue is still ongoing.

From that double-figure high, the Consumer Prices Index (CPI) began to fall and broadly continued to do so until mid-2024. At this point, it plateaued at 2% (the BoE’s target) before beginning to rise again. Factors including the rising cost of energy and higher food prices are likely to keep inflation above 2% as we head into 2026.

Inflation impacts the spending power of your money. If inflation is higher than the interest rate offered by your bank or building society, your savings are effectively losing value in real terms. Higher costs also mean that your retirement income doesn’t go as far.

Careful budgeting is key to ensuring that your income – whether from a salary or a pension – doesn’t run out when you need it most. If you need to revisit your household finances, begin by making a list of income and outgoings and look for areas where you might cut back.

Interest rates are linked to inflation, which the chancellor suggests her Autumn Budget will bring down

The base rate is a tool that the BoE employs to control inflation. When inflation is high, a rising base rate makes borrowing more expensive and saving becomes more attractive. It is hoped that this will ultimately dissuade consumers from spending and result in falling prices.

As with inflation, the base rate was affected by the Covid pandemic and, arguably, has yet to settle. The chancellor, though, expects some of her Budget measures to actively bring the inflation rate down.

The base rate fell to a historic low of just 0.1% in March 2020 but steadily increased from October 2021. By August 2023, it had reached 5.25%. It currently stands at 4% (roughly double that of the European Central Bank) with the next meeting of the BoE’s Monetary Policy Committee (MPC) not scheduled until 18 December.

With inflation remaining high for now, it is unlikely that we will see any large drops to the base rate in the near future, with a fall of just 0.5% likely between now and the end of 2026, according to some commentators.

A high base rate is unwelcome news for homeowners and means that mortgage rates could stay higher for longer, well into 2026.

The advice remains the same for your long-term financial plans: stay calm and don’t panic

While inflation and interest rates might remain above target, growth is expected to be stronger in 2026, at least compared to other G7 countries.

It’s important to remember that inflation and interest rates aren’t the UK economy, and the UK economy isn’t the stock market.

Like many economies worldwide, the UK economy is still recovering from a downturn that began with the pandemic. Shifts in areas such as employment and energy prices (also exacerbated by Russia’s invasion of Ukraine) impact the economy. Short-term issues like Trump’s tariffs can affect the stock market.

Both are relatively short-term compared to the decades-long horizon of most financial plans.

It’s important to remember that regulatory and legislative changes occur all the time. Your plan is long-term to ride out periods of short-term market volatility and robust enough to adapt to any changes that occur in wider markets or to specific rules.

Get in touch

If you’re worried about the UK economy in 2026 and its impact on your long-term plans, we can provide guidance and reassurance. Please contact us to find out how de Mellow’s expert financial planners can help.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Your home may be repossessed if you do not keep up repayments on your mortgage.

SJP Approved 27/11/2025