The Bank of England maintained UK interest rates at their current level (3.75%), warning that any further escalation of the conflict with Iran could push inflation above 4% next year and increase cost of living pressures for households. While official figures show that UK inflation fell more than expected to 2.6% in June, down from a peak of 3.8% last year, policymakers remain cautious about external risks that could drive energy and commodity prices higher. Prior to the outbreak of the Iran conflict, inflation had been on a trajectory towards the Bank's 2% target, but heightened geopolitical uncertainty now poses a risk to further progress.
Business confidence in the UK fell to its lowest level in more than a year in June, driven by weaker profit expectations and growing reluctance among service sector firms to expand their workforce or invest in capital projects. Against a backdrop of political uncertainty, persistent inflation, subdued consumer confidence and geopolitical risks, many businesses reported adapting their strategies by targeting new export markets, diversifying products and services, adopting AI technologies and strengthening cost controls. According to the S&P Global UK Business Outlook survey summarised in Figure 1, firms remained optimistic about private sector output over the next 12 months, but net optimism declined, marking the weakest reading since February 2025. The decline was largely attributed to a sharp increase in the number of service sector companies expecting activity to fall, reducing confidence in the sector to its joint lowest level since October 2022. Respondents highlighted rising labour costs, weaker client spending and global uncertainty as key challenges, although many continued to identify opportunities for growth through AI-driven service improvements and broader business diversification.
Data were collected 11-26 June 2026.
Figure 1: S&P Global/CIPS UK Services Business Activity Index