MNI BRIEF: NIESR See Bank Rate, Inflation Above BOE Forecasts

The Bank of England key policy rate will follow a higher path than current market expectations, as inflation will exceed the Bank’s predictions the National Institute of Economic and Social Research’s quarterly release says.

NIESR forecast “output to grow at around 1.2% per annum and the unemployment rate to remain around 4.5%", while inflation rises over the second half of this year. The average bank rate is expected to fall to 4.6% in 2025 and 4.1% in 2026, which seems to imply no further rate cuts this year and only two or three next year.

The Institute believes r* will remain above its pre-covid level through the rest of the decade due to higher debt-to-GDP ratio and higher awareness of the need for public investment, including in the green transition. NIESR also expects debt to rise from 99.9% of GDP in 2027-28 to 100.6% of GDP in 2028-29, although the government’s fiscal rules require it to fall in this period, although it says this rule should be modified to exclude public investment.

Additional reporting by Harrison Moore