Britain Set for Growth and Falling Inflation

By David Milliken

LONDON (Reuters) – Britain is anticipated to experience solid growth and declining inflation this year, but the Bank of England (BoE) has limited capacity to further cut interest rates, according to predictions from the NIESR think tank on Wednesday, which presented a relatively optimistic set of forecasts.

The National Institute of Economic and Social Research noted that finance minister Rachel Reeves is likely to remain aligned with her fiscal rules when the Office for Budget Responsibility updates its forecasts next month, although it emphasized the need for more attention towards long-term debt issues.

NIESR forecasts a 1.5% growth for the British economy this year, doubling the BoE’s prediction from last week and exceeding the 1.3% average from last month’s Reuters economist poll, with the same growth rate expected in 2025.

Stephen Millard, NIESR’s interim director, stated, “Although consumer and business confidence fell at the back end of last year leading to a flattening of GDP, we expect 2025 to be better as the large increase in government spending announced in the October budget kicks in.”

Regarding the disparity with BoE forecasts, NIESR economist Benjamin Caswell explained that the think tank had downplayed the influence of global trade uncertainty, weak business sentiment, and sluggish growth at the end of 2024, among other factors.

NIESR also anticipates a more favorable trajectory for inflation compared to the BoE, which expects inflation to rise to 3.7% in the third quarter of this year and not return to its 2% target until late 2027. In contrast, NIESR predicts that inflation will peak at 3.2% in January, averaging 2.4% this year and 2% in 2026.

Despite these projections, NIESR indicated that the BoE could potentially lower rates further by a quarter point this year and once more in 2026, settling at 4%—the rate at which it believes monetary policy neither exacerbates nor mitigates inflation.

Recently, the BoE noted in a survey of investors that they view the long-term neutral interest rate to be between 3-3.5%.

NIESR asserts that increasing trade and financial fragmentation, along with rising government borrowing pressures for financing green transitions and addressing ageing populations, are contributing to upward pressure on this neutral rate.