UK inflation to overshoot BoE target for next four years, NIESR forecasts

LONDON: The Bank of England will not succeed in returning inflation to target before 2030, driven by second-round effects on wages caused by the Iran war, according to forecasts from a leading academic think-tank which also nudged up its outlook for growth. The National Institute of Economic and Social Research on Tuesday forecast inflation will peak at 4.4 percent in February 2027, up from 3.8 percent in its previous forecast in July, overshooting the BoE’s 2 percent target in 2027, 2028 and 2029, before returning to target in late 2030, a year later than previously forecast.

“The UK economy has held up better than we expected this year, but it now faces the double whammy of higher energy prices and rising global borrowing costs,” NIESR Director David Aikman said. “How monetary and fiscal policy respond to them is a domestic choice, and on both fronts decisions are being deferred.”

NIESR forecasts the UK economy will grow 1.6 percent in 2026, up from a previous forecast of 1.1 percent, reflecting stronger government spending and business investment, partly driven by AI. Growth is expected to slow to 1.1 percent in 2027 and 0.9 percent in 2028. The jobless rate is projected to gradually rise from 4.8percent in 2026 to peak at 5.1 percent in 2031, and wage growth to average 3.9 percent over the coming three years.

Finance minister John Healey’s October budget did little to strengthen the public finances as difficult decisions on tax and spending had largely been deferred and plans to reduce borrowing lacked credibility, NIESR said.

Investors are pricing in two or three quarter-point rate hikes by the end of next year, but NIESR expects the BoE to raise interest rates only once, in February.

The BoE would need to raise borrowing costs to around 5percent to bring inflation back to target in the medium term, NIESR said. The BoE raised interest rates to 4 percent from 3.75 percent last week, its first rate increase in more than three years.