UK Interest Rate Cuts to Slow After Budget, Report Finds

OECD: Government Spending and Borrowing to Keep Rates Elevated Longer

Interest rates in the UK are projected to decrease less than previously anticipated over the next two years due to extensive spending and borrowing plans unveiled by Rachel Reeves in the autumn budget, according to the OECD’s annual economic survey.

The Organisation for Economic Cooperation and Development revised its forecast for UK inflation, predicting it will exceed earlier estimates in 2024, while also upgrading the economy’s growth outlook, thanks to a boost from October’s budget. The global economy is expected to grow by 3.2% in 2024 and 3.3% in 2025, slightly up from prior predictions of 3.1% and 3.2%, respectively.

The UK’s GDP is expected to rise by 0.9% in 2024, lower than the previous 1.1% projection. This adjustment follows recent data showing a mere 0.1% economic growth in the third quarter of 2024. However, GDP growth is forecast to strengthen to 1.7% in 2025, driven by increased public expenditure, before slowing to 1.3% in 2026. This is a notable improvement from the OECD’s earlier prediction of 1.2% growth for 2025.

The chancellor’s autumn budget outlined nearly £70 billion in annual public spending, funded through higher taxes and borrowing. Consequently, the OECD expects interest rates, currently at 4.75%, to drop to 3.5% by early 2026. However, this decline is less pronounced than earlier forecasts due to stronger consumption fueled by the budget.

The report notes that fiscal tightening will occur from 2024 to 2026, though less than initially anticipated, reflecting increased spending, tax adjustments, and borrowing. Headline inflation is now predicted to reach 2.7% in 2025, up from the previous estimate of 2.4%, before easing to 2.3% by 2026—remaining above the Bank of England’s 2% target.

Rachel Reeves emphasized growth as the government’s top priority, stating that the OECD’s upgraded forecast positions the UK as the fastest-growing G7 European economy over the next three years. She added that the government’s initiatives aim to translate economic growth into tangible benefits for citizens through targeted investments and regulatory reforms to “rebuild Britain for good.”