Is Britain back? Five things to watch for the U.K. in 2026

This report is from this week’s CNBC’s UK Exchange newsletter. Like what you see? You can subscribe here.

The dispatch

A new year brings with it optimism for the coming 12 months

The main hope for the U.K. must be that 2026 proves to be better — for the economy, households and individual businesses — than 2025.

The economy entered the new year flatlining and, while in 2025 the FTSE 100 index enjoyed its best one-year gain since 2009, that was hardly indicative of the health of many individual businesses.

With that in mind, here are five things to watch for the year ahead:

Rate cuts

The first is how much the Bank of England presses ahead with further interest rate cuts. It cut the Bank Rate four times during 2025, fewer times than expected, taking its main policy rate from 4.75% to 3.75%. Markets expect further reductions during 2026, but not to the extent that was being anticipated this time last year.

The rate-setting Monetary Policy Committee made clear at its last meeting, on Dec. 18, that interest rates were still on a downward path, but noted that, with every cut, this would become a closer call. Four of the nine-member committee voted against December’s rate cut and clearly worry that, with inflation at 3.2%, appreciably higher than the Bank’s target rate of 2%, the scope for going further is limited.

Of particular concern is that, as committee hawk Catherine Mann put it last month, “elevated household inflation expectations … have formed during a prolonged high‑inflation environment.”

That was borne out by the Bank’s latest quarterly Inflation Attitudes Survey published last month, revealing that median expectations for inflation over the coming year were 3.5%, although this was down from 3.6% previously.

On that basis, while further rate reductions are expected during 2026, it would be unwise to bet on the terminal rate — the level at which rate cuts end — falling below 3%.

If it does, that will be because of concerns over unemployment — the second thing to watch for.

Unemployment jitters

The jobless rate in the U.K. at the end of October — the latest month for which figures are available — stood at 5.1%, its highest since March 2021, when the economy was emerging from the last of the three Covid lockdowns.

Job vacancies have fallen steadily since peaking in mid-2022 and, at the end of November, stood at 729,000 — around the level they have been since May. Much of the blame for this is targeted at Rachel Reeves, the chancellor of the Exchequer (U.K. finance minister), who raised payroll taxes in her first Budget in October 2024 and added to the cost of hiring people in her most recent fiscal event last November.

With productivity stagnant, the jobless rate is expected to rise in 2026.

The Resolution…