UK inflation to overshoot Bank of England target for next 4 years, NIESR forecasts

NIESR Predicts UK Inflation to Stay Above Target Until 2030

Bank of England's Inflation Challenge and Economic Outlook

LONDON, Nov 11 (Reuters) - The Bank of England will not succeed in returning inflation to target before 2030, driven by second-round effects on wages caused by the Iran war, according to forecasts from a leading academic think-tank which also nudged up its outlook for growth.

NIESR's Inflation Forecasts

The National Institute of Economic and Social Research on Tuesday forecast inflation will peak at 4.4% in February 2027, up from 3.8% in its previous forecast in July, overshooting the BoE's 2% target in 2027, 2028 and 2029, before returning to target in late 2030, a year later than previously forecast.

Key Drivers Behind Persistent Inflation

"The UK economy has held up better than we expected this year, but it now faces the double whammy of higher energy prices and rising global borrowing costs," NIESR Director David Aikman said. "How monetary and fiscal policy respond to them is a domestic choice, and on both fronts decisions are being deferred."

Growth and Labour Market Projections

Economic Growth Outlook

• NIESR forecasts the UK economy will grow 1.6% in 2026, up from a previous forecast of 1.1%, reflecting stronger government spending and business investment, partly driven by AI

• Growth is expected to slow to 1.1% in 2027 and 0.9% in 2028

Labour Market Trends

• The jobless rate is projected to gradually rise from 4.8% in 2026 to peak at 5.1% in 2031, and wage growth to average 3.9% over the coming three years

Fiscal Policy and Interest Rate Expectations

Government Budget and Fiscal Policy

• Finance minister John Healey's October budget did little to strengthen the public finances as difficult decisions on tax and spending had largely been deferred and plans to reduce borrowing lacked credibility, NIESR said

Interest Rate Projections

Investor and NIESR Expectations

• Investors are pricing in two or three quarter-point rate hikes by the end of next year, but NIESR expects the BoE to raise interest rates only once, in February

BoE's Rate Policy and Impact

• The BoE would need to raise borrowing costs to around 5% to bring inflation back to target in the medium term, NIESR said

• The BoE raised interest rates to 4% from 3.75% last week, its first rate increase in more than three years

(Reporting by Suban Abdulla; editing by David Milliken)