UK interest rates should stay high until inflation eases further, OECD says

One of the world’s leading economic authorities has warned the UK that borrowing should remain expensive until the rate of price rises eases further and stays there.

Interest rates, which are at a post-2008-era high of 5.25%, should stay there, according to the Organisation for Economic Co-operation and Development (OECD).

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“The fiscal and monetary policy mix is adequately restrictive and should remain so until inflation returns durably to target,” the OECD’s economic outlook for 2024 said.

It’s an endorsement for the approach of the Bank of England whose statements on inflation have not indicated an imminent rate cut.

UK forecasts

The report from the club of developed nations also said the UK economy will “remain sluggish” with gross domestic product (GDP), a measure of everything produced in the economy, this year expected to grow 0.4% and 1% in 2025.

Some good news is expected for UK workers as the OECD said there will be “stronger” wage growth when inflation is factored in against pay.

This in turn will support a “modest pick-up” in the amount households are consuming.

But the rate of price rises will continue, the OECD said, with inflation anticipated to be “elevated” at 3.3% in 2024 and 2.5% in 2025 – above the Bank’s 2% target.

Such forecasts bolster the idea that rate-setters at the Bank could keep rates higher for longer to draw money out of the economy in an attempt to halt price rises.

No rate cut will come until at least August, the OECD added.

If the inflation forecasts prove to be true, the UK will not be the worst performer among the G20 group of industrialised nations. The average among that collection of countries will be 5.9% this year and 3.6% next year.