UK inflation seen staying above Bank of England target until 2030, NIESR says

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UK inflation above BoE target

Highlights

National Institute of Economic and Social Research forecasts UK inflation peaking at 4.4% in February 2027 and staying above the 2% Bank of England target until late 2030.
NIESR raises 2026 UK GDP growth projection to 1.6% from 1.1% due to stronger public spending and AI-driven investment, but sees a slowdown to 0.9% in 2028.
NIESR expects only one Bank of England rate hike to 4% in February while warning public finance plans in John Healey's October budget lack credibility amid persistent inflation.

Updated inflation and growth outlook

As reported by Reuters, citing the National Institute of Economic and Social Research, inflation is set to peak at 4.4% in February 2027, above its previous July forecast of 3.8%, and remain above the Bank of England's 2% target through 2029 before returning to target in late 2030. The think-tank says second-round effects on wages linked to the Iran war are a key driver behind the more persistent inflation path.

NIESR also raises its forecast for UK economic growth in 2026 to 1.6% from 1.1%, citing stronger government spending and business investment, partly driven by AI. It expects growth to slow to 1.1% in 2027 and 0.9% in 2028.

NIESR Director David Aikman says the UK economy is holding up better than expected this year but is now facing what he calls a double hit from higher energy prices and rising global borrowing costs. He says the response from monetary and fiscal policy remains a domestic choice and that decisions on both fronts are being deferred.

Rate path and public finance implications

NIESR says investors are pricing in two or three quarter-point interest rate increases by the end of next year, but it expects the Bank of England to raise rates only once, in February. It adds that borrowing costs would need to rise to around 5% to bring inflation back to target in the medium term.

The Bank of England raised interest rates to 4% from 3.75% last week, its first increase in more than three years. NIESR projects the unemployment rate will gradually rise from 4.8% in 2026 to a peak of 5.1% in 2031, while wage growth averages 3.9% over the coming three years.

The think-tank also says Finance Minister John Healey's October budget does little to strengthen the public finances because difficult decisions on tax and spending are largely deferred. It says plans to reduce borrowing lack credibility, underscoring the pressure facing policymakers as inflation stays above target for several more years.

Earlier, we discussed the UK deficit reduction plans Chancellor John Healey reaffirmed ahead of the October 28 Budget.

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