Bank to cut growth forecasts as inflation shock spells mortgage misery

The Bank of England is set to slash its UK growth forecasts as business confidence tumbles and thousands of ‘zombie’ firms battered by Labour tax hikes and the Iran war face collapse.

In what looks certain to be a gloomy health check on the economy, the central bank will on Thursday warn of weaker growth and higher inflation as the conflict in the Middle East triggers a painful energy price shock.

The oil price soared to $126 a barrel and UK government borrowing costs spiked higher on global bond markets as the outlook darkened.

While the Bank is widely expected to leave interest rates on hold at 3.75 per cent at noon on Thursday, it is feared there could be three hikes before the end of the year as it battles to keep a lid on inflation.

That would push up the cost of mortgages and loans for millions of households and businesses – dealing a hammer blow to the economy.

The update from the Bank comes after a doom-laden report warned the Iran war threatens to deal a final blow to thousands of ‘zombie’ firms already reeling from Labour’s tax hikes.

Bank of England Governor Andrew Bailey has warned of a ‘very big energy shock’

Insolvency expert Begbies Traynor Group (BTG) said companies that have managed to stagger on in recent years are now on the brink of collapse.

The group’s ‘red flag’ report found 62,193 firms were in ‘critical financial distress’ in the first quarter of the year – up 36.9 per cent on the same period of 2025.

Hotels and leisure firms are in particular distress after the government’s inflation-busting hikes in the minimum wage and national insurance tax raid.

Julie Palmer, managing partner at BTG, said: ‘Inevitably we expect to see an increasing number of zombie businesses tipped over the edge this year.’

The comments echo a report from the Resolution Foundation think-tank before the Iran war erupted that a ‘zombie apocalypse’ of struggling firms could be on the way.

Shadow chancellor Sir Mel Stride said: ‘Britain’s economy is flashing red under Labour, yet every warning is being ignored by Starmer and Reeves.

‘More than 60,000 businesses on the brink because of Reeves’ choices.

‘Labour have hiked taxes on business to pay for the Chancellor’s benefits bonanza.’

Lloyds Bank sounded the alarm, warning that the energy shock from the Middle East conflict risks unleashing ‘stagflationary pressures’ on the economy.

It slashed its UK growth forecast for this year from 1.2 per cent to 0.5 per cent and said confidence in the economy among businesses is falling at the fastest pace since April 2020 as Covid lockdowns kicked in.

A separate report from the National Institute of Economic and Social Research warned the crisis could plunge the UK into recession, push inflation to 5 per cent and wipe £68billion off the economy over the next two years

The Bank of England will deliver its verdict on Thursday having pencilled in meagre growth of 0.9 per cent for this year and 1.5 per cent for 2027 when it last published forecasts in February – before the war broke out.

At the time, it also expected inflation to return to 2 per cent this year.

But those forecasts have been blown out the water, setting the scene for sharp downgrades.

Earlier this month, Bank governor Andrew Bailey warned the world is facing a ‘very big energy shock’ that will push up prices.

Ric Traynor, executive chairman of BTG, said: ‘The shockwaves from a war in the Middle East will be felt across every corner of the global economy for some time to come.

‘After initial signs that the UK’s GDP was improving at the very start of the year, it now feels like after taking a step forward, the UK has taken a few steps backwards following one of the most severe energy shocks in living memory.’