Interest rate declines in the UK are expected to be slower than anticipated, with higher inflation forecasts driven by fiscal policies, according to the OECD’s latest report. The report also highlights global economic resilience amid ongoing challenges.
UK Interest Rates Set to Fall Slower Than Expected Amid Tax Rises and Spending Hikes
By Chourouk Derkaoui
Published on 5 December 2024 14:21
UK interest rates are expected to decline at a slower pace than previously forecast, influenced by the tax increases, expanded public spending, and elevated borrowing outlined in Rachel Reeves’ autumn Budget. The Organisation for Economic Co-operation and Development (OECD) projects that interest rates, currently at 4.75%, will drop to 3.5% by early 2026. However, the anticipated decrease is less steep due to heightened consumer spending triggered by fiscal policies.
OECD Revises Inflation and Interest Rate Forecasts
The OECD has revised its inflation outlook, predicting that headline inflation will rise to 2.7% in 2024, up from its prior estimate of 2.4%. Inflation is then expected to moderate to 2.3% by 2026, though it will remain above the Bank of England’s target of 2%. This upward revision is attributed partly to the increased fiscal activity outlined in the autumn Budget.
Economic Growth Prospects Brighten Despite Short-Term Slowdown
UK GDP is now forecast to grow by 0.9% in 2023, a slight downgrade from the earlier projection of 1.1%, following weak third-quarter growth of 0.1%. Despite this short-term dip, the economy is expected to strengthen, with GDP growth predicted to reach 1.7% in 2024, driven by significant public spending increases. Growth is projected to moderate to 1.3% in 2026.
Spending Boost Drives Growth Amid Fiscal Tightening
The autumn Budget introduced nearly £70 billion in additional annual public spending, supported by tax hikes and increased borrowing. The OECD highlighted that while fiscal policy will tighten over 2024–2026, the scale of tightening is less severe than previously anticipated due to these expansive measures. The report emphasized the interplay between fiscal stimulus and broader economic trends, noting its impact on growth and inflation.
Global Economy Remains Resilient Amid Risks
On a global scale, the OECD expects economic growth of 3.2% in 2023 and 3.3% in 2024, marking slight upgrades from previous forecasts. Despite acknowledging substantial risks and uncertainties, the organisation underscored the resilience of the global economy over the coming years.
These projections offer a cautiously optimistic view of the UK and global economies, highlighting the interplay of fiscal policy, inflation, and growth in shaping economic prospects.