Brexit, Elections And Rate Hikes: 3 Calls For The UK

(MENAFN- ING) How to read our three calls for 2027 Source: ING

"> ING's base call: Bank of England to hike in February but cut before end-2027

We expect UK inflation to rise to almost 4.5% in early 2027 and stay around 4% into the summer. Higher natural gas prices will lift household utility bills by roughly 30% by April, meaning energy adds more than one percentage point to inflation until the third quarter. Food inflation should reach 4-5%. But there's scant evidence of significant second-round effects, and we expect the jobs market and wage growth to remain benign. That should enable the Bank of England to sound the 'all clear' by summer, allowing it to cut rates in November.

Growth faces competing forces. Data centre investment and possible AI tailwinds in professional services should continue to benefit from global demand. But restrictive monetary policy, negative real wage growth and tighter fiscal policy should weigh on domestic demand, slowing UK growth in 2027.

Our risky call: PM Burnham calls a snap election

Prime Minister Andy Burnham's promise of a 10-year plan for Britain sits awkwardly with an election already due by 2029. Many of his biggest ideas, including reforms to social care and nationalisation, would require tough funding decisions that lend themselves to implementation at the start of a fresh five-year term.

Hints at an early election are stacking up, even if the government has played it down. It has delayed a Spending Review until next year. Meanwhile, Burnham's push for closer EU ties should be viewed as positioning to win left-of-centre votes at the next election.

Divisions on the political right, combined with rising poll ratings for the ruling Labour Party, offer a narrow window of opportunity, albeit one that would also represent a huge gamble. Markets most likely wouldn't like it; it would bring awkward questions about long-term borrowing needs to the surface at a time when the UK's public finances look comparatively 'OK'.

Our bold call: The UK agrees to re-join an EU customs union

Brexit is unpopular, but rejoining the EU still looks remote. It's not a major priority for voters, and Brussels has good reason to question whether any British realignment would survive a future change of government. A Le Pen victory in France could complicate things further.

But imagine an early election becomes a de facto referendum on Britain's relationship with Europe. A strong Labour majority emboldens Burnham to act quickly, while rising populism and geopolitical instability convince EU leaders there is a narrow window to pull Britain closer.

Migration is a major barrier to single market membership. Though not our base case, Britain could instead begin negotiations for a customs union, reducing barriers to goods trade. Alongside broader dynamic regulatory alignment, that would mean Britain ends 2027 considerably closer to the EU economically than almost anybody currently expects. If that happened, it would almost certainly be welcomed by a stronger pound.

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