UK-Eurozone Inflation Gap to Narrow in 2026 – Fitch
Fitch Ratings expects UK headline inflation to converge towards eurozone levels, ending the unusual divergence that has prevailed between the two this year.
The divergence between UK and eurozone headline inflation rates in 2025 helps to explain the differing monetary policy stances of the Bank of England (BOE) and ECB, Fitch said.
But Fitch Ratings forecasts UK headline inflation will fall in the coming months towards eurozone levels and also the BOE’s target, paving the way for further UK interest rate cuts
The return of headline and core inflation towards target underpins our forecast that the Bank of England will cut once more before year-end and by a further 50bp in 2026.
UK headline consumer price index (CPI) has risen by 1.3pp this year to 3.8% in September, whereas eurozone HICP has been broadly stable at around 2%. About half of this divergence reflects energy.
Fitch said UK electricity and gas inflation is currently above 9% year on year – having risen from minus 6.8% in December 2024 – reflecting changes in energy regulator Ofgem’s price cap, related to movements in wholesale gas prices.
The wedge should narrow in October, as the UK price cap has been increased by just 2%, versus 9.5% in October 2024. Services inflation has also contributed to the divergence. UK services inflation has held just below 5% this year while in the eurozone it slowed to 3.4% in October 2025.
Fitch stated that this can, to some degree, be explained by hefty, administered price rises in the UK, which will drop out of inflation in 2026. But wage stickiness, in part related to the increase in the National Living Wage, has also underpinned services inflation.
“The combination of stubbornly high wage growth, alongside rising consumer inflation expectations, has left the Bank of England searching for the ECB’s ‘good place’.
“But we think that the weakening in the UK labour market means that wages and price inflation are now firmly on the way back down. We are sticking to our forecast for Bank Rate to fall to 3.75% by year-end and to 3.25% by end-2026,” said Jessica Hinds, Director at Fitch Ratings. $200bn Export Market- Niteon Launches Neobank for African Manufacturers
