Higher borrowing costs could burden British households and businesses for years, the National Institute of Economic and Social Research (Niesr) has warned, after the Bank of England’s cautious response to inflation drew a pointed assessment from one of the country’s leading economic research institutes.
Niesr said last week’s modest rate rise was likely to keep inflation above the Bank’s 2% target until at least 2030, and that price growth would become a persistent feature of the UK economy unless policymakers acted more forcefully. The central bank’s monetary policy committee lifted the cost of borrowing from 3.75% to 4%, while signalling a further increase to counter the inflationary pressure unleashed by the war on Iran.
David Aikman, the institute’s director, argued that the conditions for a wage-price spiral were falling into place. “Inflation is set to rise above 4% in the new year, just as most pay awards for 2027 are being agreed, so the risk that it becomes embedded is rising,” he said. “One further quarter-point rise is unlikely to be enough, and the longer the MPC waits, the more it will eventually need to do.”
The inflation backdrop remains elevated. UK consumer price growth stands at 3.5%, well clear of the 2% target, driven by the soaring cost of fuel. Oil and gas prices have climbed sharply since the end of February, when the US and Israel launched their war on Iran. Brent crude has persistently traded above $100 a barrel in recent weeks, compared with roughly $70 before the conflict, although on Tuesday it briefly dipped below $90, its lowest level since 31 August, after Donald Trump downplayed the need for military action against Iran “at this point”.
Markets, however, quickly tempered that relief. US inflation climbed 0.4 percentage points from September to October, confirming that elevated energy costs were still feeding through to broader prices, and the S&P 500 index of leading American companies fell 0.9% by early afternoon on Wall Street as investors pulled back.
Niesr’s forecasts assume oil at $105 a barrel. The institute cautioned that even with recent price declines, continued difficulties in shipping and refining meant consumer prices would fall only slowly. Stephen Millard, an economist at the institute, added that the lower oil price also depended on Trump maintaining his current stance. “We’ve seen him change his mind before,” he said.
Meanwhile, the growth outlook reflects the squeeze. Niesr expects the UK economy to expand by 1.6% this year, but by only 0.9% in 2028, as high inflation, elevated interest rates and tight government spending weigh on consumer and business confidence.
The institute was also critical of fiscal policy. The chancellor, John Healey, was criticised for deferring difficult decisions in last month’s budget, which Niesr said would leave a £30bn hole in the government’s finances if the pattern of the last decade were repeated next year. Aikman warned that financial markets would punish the Treasury by raising the price of loans to the UK if it became clear that spending, in areas such as defence, was set to soar without offsetting savings elsewhere.
He described a “double whammy” from higher energy prices and rising global borrowing costs that was not being addressed. “Those pressures reflect global developments and cannot be avoided,” he said. “How monetary and fiscal policy respond to them is a domestic choice, and on both fronts decisions are being deferred.”
Whether the MPC heeds that warning at its next meeting, or lets markets price in the risk instead, may prove the decisive question for UK borrowing costs through the decade.