NIESR, the National Institute of Economic and Social Research, says the Bank of England may need to raise its policy rate to 5% to curb inflation, leaving lower-income households most exposed.
The Independent reported that NIESR expects one additional increase after the Bank of England’s move to 4% last week, but still sees consumer price inflation above the bank’s 2% goal through late 2030.
The institute raised its projected inflation peak to about 4.4% in February, from the 3.8% high point in its July outlook. It said lower-income households could be forced to scale back purchases as prices remain elevated because they have fewer ways to absorb the pressure.
NIESR said companies’ wage and pricing decisions could spread inflationary pressure early next year. It argued that interest rates may need to reach 5% to limit that second-round effect and warned that delaying action could make later increases necessary.
The institute also criticized the government’s tax and spending choices, saying delayed decisions risk adding to inflation and weakening public finances. It said major planned spending on defence, social care and disability remains unfunded, while the government’s fiscal plan relies heavily on holding down public spending in later years. NIESR estimated a fiscal-rule shortfall of about £30 billion if planned restraint fails to deliver the assumed savings.
The Independent reported that Chancellor John Healey set the government’s fiscal headroom at £14.5 billion in last month’s autumn Budget, down from £23.6 billion. It linked the drop to higher debt-interest costs over the past year. NIESR had called during the summer for tax increases or changes, or spending reductions, to cover new cost-of-living and defence commitments, The Independent reported.
NIESR upgraded its U.K. gross domestic product growth estimate for this year to 1.6% from 1.4%, citing government spending and business investment, including artificial intelligence. It expects growth to ease to 1.1% next year, below its earlier 1.3% projection.
