UK Interest Rates Projected to Remain Elevated Amidst Economic Policies

The Organisation for Economic Co-operation and Development (OECD) has projected that UK interest rates will decline more gradually than expected over the next two years due to the impact of October’s Budget. The OECD’s forecast indicates that while the Budget’s measures might stimulate short-term economic growth, they will also lead to a slower decrease in borrowing costs, with inflation levels in the UK anticipated to surpass those of other major economies.

Chancellor Rachel Reeves praised the OECD’s outlook, emphasizing that stimulating growth remains the government’s top priority. According to the OECD, the UK economy is likely to grow at a rate of 0.9% this year, a decrease from the previously estimated 1.1%. Growth is expected to accelerate to 1.7% next year, an increase from 1.2%, before slowing down to 1.3% in 2026. Reeves highlighted that the growth forecast for the year 2025 suggests that the UK will emerge as the fastest-growing economy in Europe within the G7 over the next three years.

The Chancellor has proposed nearly £70 billion per year in new public spending, which will be financed through tax increases and additional borrowing. Currently, UK interest rates stand at 4.75% and are projected to fall to 3.5% by early 2026. This slower decline is attributed partly to inflation rates higher than previously anticipated. The Bank of England recently cut interest rates for the second time this year, yet mortgage rates are on the rise due to the central bank’s indication that future cuts may not be as swift as expected.

Concerns over the Budget’s implications include an impending increase in the National Insurance rate for employers, which will rise from 13.8% to 15% in April next year. This change is expected to impact businesses significantly as they navigate the balance between pricing, wages, and employment levels. Bank of England Governor Andrew Bailey acknowledged the existing uncertainties pertaining to the National Insurance adjustments and emphasized their importance in business decision-making.

Critics from the Conservative Party have slammed Labour’s Budget, labeling it as detrimental to hiring and expansion efforts, attributing this to what they call the National Insurance ‘jobs tax’. Shadow business secretary Andrew Griffith claimed that these measures are adversely affecting working individuals seeking jobs. The OECD’s economic forecasts, released bi-annually, serve as a guide for businesses and governments, although their accuracy can vary over time, impacting planning and policy decisions.