Interest rates forecast to be higher for longer due to Budget

Getty Images

UK interest rates will fall more slowly than expected over the next two years due to November's Budget, according to an influential think tank's forecasts.

Although Budget measures would boost the economy in the short-term, changes to tax and spending would mean the cost of borrowing would fall more slowly, the Organisation 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 welcomed the forecast, however, saying "growth is our number one priority".

The OECD now expects the economy to grow more slowly this year than it forecast three months ago, before accelerating rapidly next year and slowing again in 2026.

Reeves said the upgrade in the growth forecast "will mean the UK is the fastest growing European economy in the G7 over the next three years".

She said Labour had not taxed people’s payslips at the Budget and that the government is "determined to deliver growth".

In October, Reeves set out plans to increase public spending by nearly £70bn per year of extra, funded through tax rises and more borrowing.

On Wednesday, the OECD said that UK interest rates, which currently stand at 4.75%, are expected to fall back to 3.5% by early 2026.

It said that this was partly due to higher than expected inflation.

Last month the Bank of England cut rates for the second time this year,

However, mortgage costs have been rising after the Bank of England also said that future interest rate cuts may not come as often and as quickly as previously thought.

In the words of one mortgage broker, that was because the Budget delivered by Chancellor Rachel Reeves "threw a spanner in the works".

Spending pledges risked inflating some prices, something high interest rates are designed to control.

Other Budget concerns include the possible effects of a hike in the National Insurance rate for employers.

Bank of England Governor Andrew Bailey said on Wednesday that businesses were currently weighing those effects.

"The biggest issue now is the response to the National Insurance change; how companies balance the mixture of prices, wages, the level of employment, what is taken on margin, is an important judgement for us."

"There is uncertainty there and we need to see how the evidence evolves," he told the Financial Times Global Boardroom event.

The rate of employer national insurance will be rising from 13.8% to 15% in April next year.

A number of businesses have warned the higher costs, could be passed onto customers via higher prices or that it may stop them creating new roles.

The Conservatives said on Wednesday that "Labour’s business-bashing Budget has called time on hiring and expansion plans through its National Insurance jobs tax".

Shadow business secretary Andrew Griffith said this was "doing real harm to working people that are searching for a new job".