Bank of England’s inflation response ‘risks higher interest rates for longer’
Summary
The National Institute of Economic and Social Research says the Bank of England’s recent interest-rate increase may not be enough to contain inflation, potentially keeping inflation above its 2% target until at least 2030. It also warned that high energy prices, borrowing costs and tight public spending could slow UK growth and strain government finances.Key Facts
- The Bank of England raised its key interest rate from 3.75% to 4% and signaled it may raise rates again.
- UK inflation is 3.5%, above the Bank of England’s 2% target, with fuel costs contributing to the increase.
- Niesr director David Aikman said inflation could exceed 4% in the new year and that another quarter-point rate increase might not be sufficient.
- Niesr based its UK and global economic forecasts on oil prices of $105 a barrel and said shipping and refining difficulties could slow the fall in consumer prices.
- Niesr forecasts UK economic growth of 1.6% this year and 0.9% in 2028.
- Niesr said repeating the past decade’s pattern of deferring difficult budget decisions could leave a £30 billion gap in government finances next year.
- Aikman warned that financial markets could raise UK borrowing costs if government spending, including on defence, rises without savings elsewhere.
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