UK bank lending to businesses is poised for a significant slowdown this year, hampered by persistent global tensions and economic uncertainty. Net growth in lending is forecast to halve to 3.5%, a sharp drop from the 6.9% increase recorded in 2025, according to EY Item Club.
The anticipated deceleration follows a period of boosted lending activity fueled by falling interest rates. The Bank of England initiated a series of rate cuts in August 2024, bringing the benchmark rate down from a post-financial crisis high of 5.25% to 3.75% by the end of 2025. This easing of monetary policy had provided a tailwind for businesses seeking financing.
However, a resurgence of geopolitical risks and broader economic pressures are now expected to weigh on lending growth. Dan Cooper, EY UK &. Ireland head of banking and capital markets, cautioned that trading conditions are “likely to be challenging this year for businesses both big and small” and for the banks that support them. Despite these headwinds, Cooper maintains an overall outlook of growth.
The slowdown in lending growth comes as the UK navigates a complex economic landscape. The Bank of England has repeatedly warned of elevated global risks to financial stability, identifying geopolitical tensions, trade fragmentation, and pressures on sovereign debt markets as key sources of concern. The UK’s open economy and position as a major financial center leave it particularly vulnerable to external shocks.
Adding to the uncertainty, President Trump’s recent imposition of new tariffs on global trading partners – including a 5% increase on UK goods – has rattled businesses. This move, following a US Supreme Court ruling, has prompted alarm among UK companies concerned about the impact on international trade.
Despite the short-term challenges, EY anticipates a rebound in lending growth from 2027 onwards, coinciding with an expected strengthening of the UK economy. The forecaster predicts a 4.5% increase in net business lending in 2027 and a further rise to 4.8% in 2028. This suggests the current slowdown is viewed as a temporary dip rather than a long-term trend.
The Bank of England’s recent decision to slash capital rules for UK lenders, as highlighted in a December 2025 report, reflects the central bank’s attempt to bolster financial stability amidst these growing risks. The Financial Policy Committee (FPC) identified potential weaknesses in the private credit market, referencing the collapses of First Brands and Tricolor, and emphasized the need for vigilance.
The Bank also cautioned against an emerging “AI bubble,” noting that equity valuations in the sector “remain materially stretched” and drawing parallels to the dot-com boom and the global financial crisis. The increasing links between AI firms and credit markets raise concerns that an asset price correction could lead to significant losses for lenders and pose a threat to financial stability.
Martina Keane, EY UK & Ireland financial services leader, emphasized the need for banks to maintain a long-term strategic perspective despite the current headwinds. “In today’s inherently unpredictable trading environment, waiting for stability is not an option, and given the brighter horizon ahead, a one-year dip in lending growth shouldn’t deter banks from progressing longer-term strategies,” she said.
The EY Item Club’s forecast anticipates marginal economic growth in 2026, constrained by geopolitical uncertainty, tariff disruptions, and tighter fiscal policy. However, the expectation is that these factors will create a temporary setback, paving the way for a more robust recovery in the years ahead. The interplay between economic conditions, global risks, and monetary policy will be crucial in shaping the trajectory of business lending in the UK.
