UK interest rates higher for longer due to Budget, says OECD

UK interest rates will fall more slowly than expected over the next two years in the wake of the latest Budget, according to an influential think tank’s forecasts.

Although Budget measures would boost the economy in the short-term, changes to tax and spending would mean the cost of borrowing would fall more slowly, said the Organisation for Economic Co-operation and Development (OECD).

The measures are also likely to push UK inflation, which measures how prices rise over time, above the rate seen in other major economies.

Chancellor Rachel Reeves welcomed the forecast, however, saying “growth is our number one priority”.

The OECD predicted that UK economic growth would get stronger, rising to 1.7% in 2025, “boosted by the large increase in public expenditure set out in the autumn Budget”.

In October, Reeves set out plans to increase public spending by nearly £70bn per year of extra, funded through tax rises and more borrowing.

On Wednesday, the OECD said that UK interest rates, which currently stand at 4.75%, are expected to fall back to 3.5% by early 2026.

It said that this was partly down to inflation coming in higher than expected, so there is not as sharp a drop as previously forecast.

Currently, it expects that inflation will stand at 2.7% next year, up from the 2.4% previously expected.

It is then forecast to fall back to 2.3% in 2026, remaining above the Bank of England’s target of 2%.