The Organisation for Economic Co-operation and Development (OECD), forecast for UK interest rates suggests they will fall more slowly than expected over the next two years, largely due to the fiscal changes introduced in October 2024’s UK Budget. While the UK government’s budget measures are expected to provide a short-term economic boost, they will also keep borrowing costs higher for an extended period, according to the OECD. This could result in UK inflation remaining above the levels seen in other major global economies.
UK Economic Growth Forecasts and Budget Impact
The OECD’s updated projections indicate that the UK is on track to become the fastest-growing economy in Europe over the next three years, although growth will be slower in 2024 than initially expected.
Key UK Economic Growth Projections:
- 2024: 0.9% growth (down from 1.1%)
- 2025: 1.7% growth (up from 1.2%)
- 2026: 1.3% growth
UK Interest Rates and Inflation Outlook
The OECD predicts that UK interest rates, currently at 4.75%, will gradually fall to 3.5% by 2026. However, this is contingent on inflation remaining higher than expected. The Bank of England has already reduced rates twice in 2023, but mortgage costs continue to rise as interest rate cuts may not happen as quickly or as often as anticipated, partly due to the effects of the 2024 UK Budget.
Impact of National Insurance Changes on Businesses
One of the key concerns arising from the Budget is the planned increase in National Insurance contributions for employers, set to rise from 13.8% to 15% in April 2024. Some businesses fear that this increase could result in higher prices for consumers or lead to fewer new jobs being created. Bank of England Governor Andrew Bailey pointed out that businesses are still evaluating how the National Insurance hike will affect their pricing strategies, wages, and overall employment levels.
The Budget also includes plans to increase public spending by nearly £70 billion annually, funded by tax increases and additional government borrowing.
The Conservative Party has criticized the Labour government’s National Insurance rise, calling it "business-bashing",warning it could hurt job creation and adversely affect workers seeking employment. But Chancellor Rachel Reeves has welcomed the OECD's forecast, emphasizing that economic growth is the UK government’s top priority.
