OECD calls for UK to cut interest rates next year
The Bank of England must cut interest rates next year to boost the economy, the OECD said, as it lowered its UK growth forecasts.
The Paris-based group predicted Britain would be the only major country to trim borrowing costs in 2027, with the US Federal Reserve and European Central Bank both expected to keep rates on hold next year.
It expects the central bank to reduce rates from 3.75pc to 3.5pc in 2027 as inflationary pressures start to fade.
By contrast, City economists and investors are pricing in several rate rises from the Bank as the conflict in the Middle East rages on.
Andrew Bailey, the Governor of the Bank, warned last week that interest rates could rise if the Iran war continues to intensify, warning inflation was now on course to hit 4pc.
However, the OECD’s economists warned that Britain faces slower growth and higher inflation than expected next year, threatening to undermine Andy Burnham’s hopes of reviving the economy.
It cut its forecast for Britain’s economic growth in 2027 to 1pc, down by 0.1pc.
That is despite its economists predicting the UK’s annual growth this year will be about 1.1pc, up from earlier predictions of 0.9pc.
Britain’s downgrade for 2027 is equal to or more than that meted out to any other G7 economy except Canada, which is under siege from Donald Trump’s tariffs.
The OECD, a Paris-based policy forum for industrialised countries, said the Iran war and the El Niño weather event would fuel higher food and energy costs, threatening to push up interest rates.
The downgrade comes as Mr Burnham uses a trip to New York to sell Britain as a business and investment destination.
The Prime Minister is also just weeks away from a difficult Budget, which economists warn will already require up to £10bn of tax increases or spending cuts.
The OECD said rising government borrowing costs – which are at their highest level since 2007-08 in many rich countries – underlined “more than ever the need for enhanced efforts to contain and reallocate government spending, improve public sector efficiency and strengthen revenues”.
It follows a warning by Kristalina Georgieva, the head of the International Monetary Fund, who told the BBC on Wednesday that advanced economies, including the UK, needed to reduce debt levels amid spiralling global borrowing costs.
Ms Georgieva said: “There are these two things that must be done: bring debt levels down, put fiscal consolidation as a priority, and make sure that the central banks deliver on their mandate for price stability.
“It is impossible to stress strongly enough how critical it is to get the courage to take the steps that are necessary.”
In its three-monthly economic outlook, the OECD also warned that central banks need to be ready to raise interest rates.
The report said: “Faced with the renewed energy price shock and above-target inflation, central banks need to ensure that inflation expectations stay well-anchored.
“Further monetary policy adjustments may be needed if price pressures show signs of broadening or if growth prospects weaken substantially.”
In Britain, the OECD expects inflation to remain above the Bank of England’s 2pc target in 2027 for a seventh straight year.
The forecast for headline inflation was increased by 0.2 percentage points to 2.6pc, equal to or higher than all other G7 countries bar Germany, which faces a potential gas-price crisis.
The OECD said Britain’s economy would expand faster next year than those of France, Italy and Japan. But UK growth will trail Germany – even though its factories are under pressure from China – and Canada, where businesses are reeling from US tariffs.
Emma Reynolds, the Chief Secretary to the Treasury, said: “Despite unprecedented pressures and conflict in both the Middle East and in Europe, the UK economy is showing strong resilience.”
The US economy is expected to grow at 2.1pc, powered by the boom in AI investment.
But the OECD said there was “a risk that AI investment returns disappoint or take longer to materialise than currently expected, especially if bottlenecks emerge for inputs such as electricity or advanced semiconductors”.
AI could also be slowed by “mounting security concerns” among companies and consumers, the OECD said. The AI industry’s heavy and complex borrowing, and the pressure on bond yields, could also trigger their share prices to fall.
Andrew Griffith, the shadow chancellor, said: “The OECD has downgraded the UK’s growth for 2027 to just a third of the average growth rate of the G20. We can and should aspire to do much better.
“It urges countries to control spending and improve public sector efficiency. Instead, this Government is trying to find new ways to tax you whilst having to pay interest rates on their borrowing, which are the highest in the G7.”