Inflation and interest rates in the UK will stay relatively high over the next two years due to measures in the government’s Autumn Budget, a think tank has predicted.
An outlook published by the Organisation for Economic Co-operation and Development (OECD) said the government’s fiscal stimulus would keep underlying price pressures higher, leaving headline inflation above target.
It predicted inflation would rise from 2.6% this year to 2.7% in 2025, before falling – but staying above target – to 2.3% in 2026.
The forecast for next year’s headline inflation was higher than the 2.4% rate the OECD originally predicted in its September interim report.
It also said core inflation was “still higher than desirable in many countries” due to “lingering price pressures”, saying half the items in the UK’s inflation baskets had risen at an annual rate above 3% in October.
The OECD said monetary policy would continue to ease until early 2026, with the base rate gradually falling from its current level of 4.75% to 3.5%.
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However, it added that “persistent price pressures on the back of the strong increase in government expenditure and uncertainty about the degree of slack in the labour market could require the monetary stance to remain tighter for longer”.
The report said the UK economy would grow above its potential, expanding by 1.7% next year and 1.3% in 2026. While next year’s growth would be supported by government consumption and investment, the rise in taxes could start to weigh on private consumption and additional government borrowing would force out business investment.
Meanwhile, extra household savings, population growth and monetary easing should “drive strong residential investment”, the OECD said.
Uncertainty for mortgage rates?
Ben Thompson, deputy CEO at Mortgage Advice Bureau (MAB), said the OECD’s outlook could have an impact on swap rates and, consequently, mortgage pricing.
He said: “The OECD’s predictions could lead to some uncertainty in the swap markets and, as a result, moves in mortgage rates in the coming days. However, this is no reason for any drop in optimism – this isn’t new news.
“Overall, rates are falling, which is good news for homebuyers. 2025 is set to be a good year for prospective homeowners, so now is the time to get mortgage ready and speak to a broker.”
