NIESR warns UK rates may stay high until 2030 due to delayed Bank action

The National Institute of Economic and Social Research (NIESR) published a critique on Wednesday stating that the Bank of England’s recent monetary policy decisions have likely locked the UK into higher interest rates for the next several years. The institute argues that a hesitant response to surging prices will keep inflation above the central bank’s 2% target until at least 2030.

David Aikman, the director of the NIESR, stated that the conditions are ripe for a wage-price spiral. He noted that inflation is projected to exceed 4% in the coming year, which coincides with the agreement of most salary awards for 2027. Aikman said, “The risk that it becomes embedded is rising.” He added that a single quarter-point increase is insufficient and that delays force the committee to act more aggressively later.

The Bank of England’s monetary policy committee raised the base rate from 3.75% to 4% last week. This move aimed to counter inflationary pressures triggered by the conflict between the US, Israel, and Iran. Current UK inflation stands at 3.5%, well above the target level, primarily due to the sharp rise in fuel costs since the war began in late February.

Energy markets have reacted to geopolitical developments. Brent crude oil traded above $100 a barrel for several weeks, a significant jump from the pre-war level of approximately $70. On Tuesday, the price dropped below $90 at one point, marking the lowest level since August 31. This decline followed President Donald Trump’s comments downplaying the need for further military action against Iran.

However, investors moderated their optimism after US inflation data showed a 0.4 percentage point increase from September to October. This rise confirmed that high energy costs continue to impact consumer prices. The S&P 500 index fell 0.9% by the early afternoon on Wall Street. The NIESR based its growth forecasts on oil prices of $105 a barrel, but it cautioned that shipping and refining issues will keep consumer prices from dropping quickly.

Stephen Millard, an economist at the institute, expressed doubt about the durability of lower oil prices. He said, “We’ve seen him change his mind before,” referring to President Trump’s shifting policy stance. The NIESR forecasts UK economic growth of 1.6% for the current year, but expects a slowdown to 0.9% in 2028 as high rates and tight fiscal policy weigh on confidence.

The institute also criticized Chancellor John Healey for delaying difficult decisions in the recent budget. The NIESR estimated a £30bn hole in government finances if the pattern of deferring cuts over the last decade continues. Aikman warned that financial markets would punish the Treasury by raising borrowing costs if spending on areas like defense increases without corresponding savings. He described the situation as a “double whammy” of energy and global borrowing costs, stating that “decisions are being deferred” on both monetary and fiscal fronts.