UK inflation to overshoot Bank of England target for next 4 years, think-tank 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 (Nov 10) forecast inflation will peak at 4.4 per cent in February 2027, up from 3.8 per cent in its previous forecast in July, overshooting the BoE’s 2 per cent 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 per cent in 2026, up from a previous forecast of 1.1 per cent, reflecting stronger government spending and business investment, partly driven by AI.

Growth is expected to slow to 1.1 per cent in 2027 and 0.9 per cent in 2028.

The jobless rate is projected to gradually rise from 4.8 per cent in 2026 to peak at 5.1 per cent in 2031, and wage growth to average 3.9 per cent over the coming three years.

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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 5 per cent to bring inflation back to target in the medium term, NIESR said.

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The BoE raised interest rates to 4 per cent from 3.75 per cent last week, its first rate increase in more than three years. REUTERS