UK interest rates will fall more slowly than expected over the next two years following the latest budget, an influential think tank has predicted.
Although the fiscal measures would boost the economy in the short term, changes to taxation and spending would cause the cost of borrowing to fall more slowly, the Organization for Economic Co-operation and Development (OECD) said.
The measures are also likely to push UK inflation, which measures how prices rise over time, above the rate seen in other major economies.
Chancellor Rachel Reeves, however, welcomed the forecast, saying “growth is our number one priority”.
The OECD predicted that UK economic growth would strengthen, reaching 1.7% in 2025, “boosted by the large increase in public spending announced in the autumn budget”.
In October, Reeves outlined plans to increase public spending by almost £70 billion more a year, financed by tax rises and more borrowing.
On Wednesday, the OECD said UK interest rates, which currently stand at 4.75%, are expected to fall to 3.5% by early 2026.
He explained that this was partly because inflation was higher than expected, so the decline is not as steep as expected.
Currently, he expects inflation to stand at 2.7% next year, compared to the previously expected 2.4%.
It is then expected to fall to 2.3% in 2026, remaining above the 2% target set by the Bank of England.
