UK Interest Rates: Longer Stability Amid Budget Changes

The latest forecast from the Organisation for Economic Co-operation and Development (OECD) indicates that UK interest rates are expected to remain higher for a prolonged period due to measures outlined in the recent October Budget. Despite the short-term economic boost anticipated from the Budget, the implemented changes in tax and government spending are predicted to slow the rate of decline in borrowing costs over the next two years.

Chancellor Rachel Reeves highlighted the forecast, asserting that fostering economic growth remains a top priority. The OECD revised its growth outlook for the UK economy, projecting a 0.9% growth for this year—down from a previously estimated 1.1%. In contrast, the organization anticipates a stronger performance next year, increasing the growth forecast to 1.7% from 1.2%. Nonetheless, growth is expected to moderate again in 2026 with a forecast of 1.3%.

Reeves expressed satisfaction with the upgraded growth forecast for 2025, claiming it positions the UK as the fastest-growing economy within the G7 over the next three years—a significant aspect of her economic strategy which she stated does not involve taxing workers’ paychecks directly in the Budget. The Chancellor’s plans include a substantial public spending increase of nearly £70 billion annually, funded through taxation adjustments and additional borrowing.

As of now, UK interest rates stand at 4.75%, and the OECD predicts a gradual decrease to approximately 3.5% by early 2026. However, this expected decline is complicated by inflation forecasts suggesting that the UK’s inflation rate could outperform other major economies in the coming years, which plays a crucial role in dictating monetary policy and borrowing costs.

Recently, the Bank of England made a slight reduction in interest rates, but rising mortgage costs have led to concerns regarding future cuts, which may not arrive as regularly or swiftly as hoped. This volatility was attributed to the Budget’s implications, which may inadvertently increase certain price levels meant to be controlled by high interest rates.

Further complicating the outlook are concerns regarding a proposed increase in the National Insurance rate for employers, which is set to rise from 13.8% to 15% in April of the following year. Bank of England Governor Andrew Bailey underscored the uncertainty surrounding this change, warning it could lead companies to adjust their pricing strategies, wage levels, and hiring practices significantly.

In opposition, Conservatives criticized what they termed as “Labour’s business-bashing Budget,” claiming it jeopardizes hiring and expansion plans through increased taxation on employment. Shadow business secretary Andrew Griffith argued that the budgetary measures are detrimental to working individuals actively seeking employment, signaling a deepening concern around the potential economic ramifications of these fiscal strategies.