Bad newsUK Inflation Seen Above Target Until Late 2030 as Rates Rise to 4%
NIESR forecasts UK inflation peaking at 4.4 percent in February 2027 and staying above the Bank of England’s 2 percent target for four years. Bank Rate rose to 4 percent last week, and NIESR says it may need to reach about 5 percent.
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UK inflation will stay above the Bank of England’s 2 percent target for four more years, according to the National Institute of Economic and Social Research (NIESR). Its forecast, reported by Reuters, has consumer price inflation peaking at 4.4 percent in February 2027, up from 3.8 percent in its July forecast. It overshoots the target in 2027, 2028 and 2029 and returns to 2 percent only in late 2030, a year later than NIESR said before.
Wages and energy keep prices up
NIESR blames second-round effects on wages tied to the Iran war: higher energy costs feeding into pay settlements. It expects wage growth to average 3.9 percent over the next three years. Director David Aikman cites a “double whammy of higher energy prices and rising global borrowing costs”. Unemployment is projected to rise rising from 4.8 percent in 2026 to a peak of 5.1 percent in 2031.
The Bank of England raised Bank Rate to 4 percent from 3.75 percent last week, Reuters says, its first increase in more than three years. The Bank’s own summary shows the vote was 8 to 1. Catherine Mann wanted a larger rise of half a point, to 4.25 percent. The Bank said policy is not on a pre-set path, and its next decision is on 17 December.
Rates and the public finances
NIESR expects only one more rise, in February, but says Bank Rate may need to reach about 5 percent to bring inflation back to target in the medium term. Investors price in two or three quarter-point rises by the end of 2027. NIESR’s expected path is lighter than the market’s, but it says the Bank may need to go further than either.
The think tank also faults the October budget by Finance Minister John Healey. It says the budget did little to strengthen the public finances, deferred difficult tax and spending decisions and left plans to cut borrowing lacking credibility.
One thing is better than expected. NIESR raised its 2026 growth forecast to 1.6 percent from 1.1 percent, helped by government spending and business investment, partly driven by AI. It expects growth to slow to 1.1 percent in 2027 and 0.9 percent in 2028. We could not find how NIESR’s projections compare with the Bank’s own November forecast in the sources we read.
