The Organisation for Economic Co-operation and Development (OECD) has adjusted its forecasts for UK inflation and interest rates, anticipating a slower decline than previously projected. This revision follows Chancellor Rachel Reeves’ recent budget, which outlined significant spending and borrowing plans.
Table Content:
The OECD now expects interest rates to fall to 3.5% by the beginning of 2026, down from the current 4.75%. This is a less steep decline than earlier anticipated. Headline inflation is now predicted to be 2.7% for 2025, up from the previous forecast of 2.4%. While inflation is expected to further decrease to 2.3% in 2026, this still surpasses the Bank of England’s 2% target.
The OECD’s annual economic survey attributes these persistent price pressures to the substantial increase in government expenditure and lingering uncertainty regarding the labor market’s slack. This situation could necessitate a tighter monetary policy for an extended period. The report warns that “wage-driven pressures on the price of services and the fiscal stimulus will keep underlying price pressures elevated,” contributing to inflation remaining above the Bank of England’s target for the next two years.
UK Economic Growth Projections Revised Upwards
Despite the inflation concerns, the OECD has revised its UK growth projections upwards. The organization now anticipates growth of 0.9% this year and 1.7% in 2025, an improvement from the May forecasts of 0.4% and 1% respectively. However, the OECD cautions that this growth is primarily fueled by a “large increase in public expenditure,” which could lead to a permanent increase in debt. Growth is expected to moderate to 1.3% in 2026, with public debt projected to remain at 100% of GDP and potentially rise further.
Global Economic Outlook and Labor Market Challenges
Globally, the OECD predicts economic growth of 3.2% this year and 3.3% next year. Lower inflation, job growth, and interest rate cuts are expected to offset fiscal tightening measures implemented in some countries. These figures represent a slight improvement from the OECD’s September interim report, which forecasted 3.1% and 3.2% growth, respectively.
The OECD emphasizes the importance of benefit reforms to encourage labor force participation. The report highlights that the UK experienced a more significant post-pandemic contraction in its labor force compared to other OECD economies, second only to Costa Rica.
Chancellor’s Response to OECD Report
Chancellor Rachel Reeves responded to the OECD report by emphasizing the government’s commitment to economic growth. She noted that the upward revision in growth projections positions the UK as the fastest-growing European economy in the G7 over the next three years. Reeves highlighted the government’s efforts to protect household incomes from higher taxes and underscored the importance of growth that translates into tangible improvements in living standards. She outlined key initiatives, including the National Wealth Fund, regulatory reforms, and changes to pension funds and planning laws, aimed at attracting investment and fostering long-term economic prosperity.
The OECD’s revised forecasts and the Chancellor’s response underscore the complex economic landscape facing the UK. The interplay between government spending, inflation, interest rates, and labor market dynamics will continue to shape the country’s economic trajectory in the coming years.
