Getty ImagesUK interest rates will fall more slowly than expected over the next two years due to the October Budget, an influential think tank has forecast.
The Organization for Economic Co-operation and Development (OECD) said that while the budget measures would boost the economy in the short term, changes in taxes and spending meant borrowing costs would fall more slowly.
The measures are also likely to push up UK inflation, which measures how prices rise over time, to a higher rate than seen in other major economies.
Chancellor Rachel Reeves welcomed the forecast, however, saying “growth is our top priority”.
The OECD now expects the UK economy to grow more slowly this year than it predicted three months ago, before accelerating sharply next year and slowing again in 2026.
- It expects growth of 0.9 percent this year, down from 1.1 percent
- It forecast 1.7% next year, up from 1.2%
- In 2026, it expects 1.3 percent growth.
Reeves said the upgrade to growth forecasts for 2025 would mean the UK is the fastest-growing European economy in the G7 over the next three years.
He said Labor had not taxed people’s payslips in the Budget and the government was “committed to delivering growth”.
In October, Reeves set out plans to increase public spending by around £70bn a year, financed by tax increases and further borrowing.
On Wednesday, the OECD said UK interest rates, currently at 4.75 percent, are expected to fall to 3.5 percent by early 2026.
It said this was partly due to higher-than-expected inflation.
The OECD’s economic forecasts are released twice a year, and are intended to provide guidance on what is most likely to happen in the future. But they can be off the mark, and they change.
Businesses use projections to help plan investments, and governments use them to guide policy decisions.
Last month, the Bank of England cut rates. to 4.75 percent for the second time this year.
however, Mortgage costs are rising The central bank also said that future interest rate cuts may not happen as often and as quickly as previously thought.
In the words of one mortgage broker, this was because the budget presented by Chancellor Rachel Reeves “threw a spanner in the works”.
Spending on commitments carries the risk of some inflation, some designed to control high interest rates.
Other budget concerns include the potential impact of a rise in National Insurance rates for employers.
Bank of England Governor Andrew Bailey said on Wednesday that businesses were currently weighing the impact.
“The big issue now is the response to the change in National Insurance; how companies balance the mix of prices, wages, employment levels, what is charged at the margin is a key decision for us.”
“There is uncertainty and we have to see how the evidence develops,” he told a Financial Times global boardroom event.
The employer’s National Insurance rate will rise to 15% from 13.8% in April next year.
A number of businesses have warned of high prices, which could be passed on to consumers through higher prices. That it can prevent them from creating new roles.
The Conservatives said on Wednesday that Labour’s “business-critical budget has given time to jobs and expansion plans through its National Insurance jobs tax”.
Andrew Griffiths, the shadow business secretary, said it was “doing real harm to working people who are looking for a new job”.
