Consultancy firm EY analysts warned on Monday that the UK economy could contract in 2027 if the Strait of Hormuz remains closed until mid-next year.

Based on an assumption that the Strait of Hormuz will reopen by the end of September, EY has slightly raised its UK economic growth forecast for this year from 0.8% to 0.9%, and expects growth of 1.2% in 2027.

"If the Strait of Hormuz reopens within the next few months, we expect the UK to avoid a more severe economic downturn; but if the closure persists into 2027, it will push up inflation and could lead to a contraction in the UK economy next year," said Peter Arnold, EY's chief UK economist.

EY forecasts that if the Strait of Hormuz remains closed until early to mid-2027, UK economic growth this year will slow to 0.5%, and the economy will contract by 0.2% in 2027. Under this scenario, inflation could rise to 6.4% by the end of 2026; in contrast, if the Strait of Hormuz reopens within the next few months, the peak inflation rate this year would be 3.5%.

The Bank of England's forecasts last week showed that, in an adverse scenario where oil and gas prices remain 30% to 60% higher than market expectations, the economy would grow by nearly 1% next year, with quarterly inflation peaking at 4.5%.

EY expects the Bank of England to keep interest rates unchanged this year, and then cut rates in April and July next year, lowering the rate from 3.75% to 3.25%.