Business · Economy · 1 hr ago
Think tank says UK interest rates may need to reach 5% to curb inflation
The National Institute of Economic and Social Research says UK interest rates may need to reach 5% to bring inflation under control.
The Bank of England raised rates to 4% last week, its first increase in more than three years, and NIESR expects one further rise.
NIESR forecasts inflation will peak at about 4.4% in February, and says a smaller rate increase could leave it above the Bank’s 2% target until late 2030.
The think tank warns that rising prices would hit poorer households hardest, because they may have to buy less rather than draw on savings.
It says companies setting wages and prices early next year could add to inflation, while the Government has postponed difficult tax and spending decisions.
NIESR warns that plans to control public spending could miss fiscal rules by about £30 billion if they fall behind as previous plans have.
The Bank’s next decision on rates is not stated, while NIESR expects UK economic growth to slow from 1.6% this year to 1.1% next year.
NIESR says UK interest rates may need to rise to 5% to curb inflation and limit the risk of second-round effects.
The think tank says the Bank of England’s recent increase to 4% and one further expected rise would not be enough to bring inflation back to its 2% target until late 2030.
NIESR forecasts CPI inflation will peak at around 4.4% in February, above its previous forecast of 3.8%.
It also criticises the Government for postponing difficult tax and spending decisions, warning that public finances could be put under further pressure.
NIESR forecasts GDP growth of 1.6% this year and 1.1% next year.
- Who
- The National Institute of Economic and Social Research (NIESR).
- What
- NIESR says interest rates may need to rise to 5% to control inflation.
- When
- The report was published on 11 November 2026.
- Where
- The UK.
- Why
- NIESR says further increases are needed to tackle the risk of second-round inflation effects as companies set wages and prices.
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NIESR called for the Government to raise or reform taxes or cut spending to fund new cost-of-living and defence commitments.
Chancellor John Healey confirmed in the autumn Budget that fiscal headroom would fall to £14.5 billion from £23.6 billion.
The Bank of England raised interest rates to 4%, its first increase in more than three years.
NIESR published forecasts warning that rates may need to reach 5% to control inflation.
- Interest rate level
- 4% after the Bank of England’s increase last week
- Rate NIESR says may be needed
- 5%
- Inflation forecast
- Peak of around 4.4% in February
- Inflation target
- 2%
- Fiscal headroom
- £14.5 billion, down from £23.6 billion
- GDP growth forecast
- 1.6% this year; 1.1% next year
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