Niesr urges Bank of England to raise rates to 5% as inflation risks run to 2030
The National Institute of Economic and Social Research has urged the Bank of England to raise interest rates to 5 per cent, warning that inflation may not return to the 2 per cent target until 2030. In its autumn report, the Westminster-based think tank said the Bank should tighten sharply after the Monetary Policy Committee lifted rates to 4 per cent last week.
Niesr's central concern is second-round effects. About three quarters of UK workers are due to agree pay settlements in the first three months of next year, just as inflation is expected to peak above 4 per cent. The institute warned that price growth expectations and a lack of slack in the economy could embed inflation, and said the Bank's rate-setters were "behind the curve", with two rises insufficient to return inflation to target.
In its own forecast last week, the Bank said inflation would peak at 4.9 per cent by July next year before falling to 2 per cent in 2028. Governor Andrew Bailey said he could "see the argument" for another hike to 4.25 per cent if energy prices stayed higher and a larger inflation spike emerged. Those projections assumed President Trump ends the Iran war, Gulf trading flows resume and Brent crude falls from $108 a barrel to about $75 by 2028; oil was around $90 on Tuesday after Trump suggested the war was "effectively over".
Niesr calculated that rates at 4.75 per cent would knock about 0.4 percentage points off GDP growth in 2028 and 2029, leaving the economy expanding by just 0.5 per cent in 2028, but argued an immediate further hike was needed to prevent a larger hit later. It also said higher debt interest payments could make it harder for Chancellor John Healey to keep the public finances in order, with his fiscal rules at risk by up to £30bn if he tops up defence and care spending while keeping other departments growing in real terms. The 2027 Spending Review would be the "real test", it said, urging the government and opposition to be "more realistic" about spending cuts and tax rises.
