BOE to Hold Rates This Year and Cut in 2027, OECD Forecasts

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(Bloomberg) — The Bank of England will keep interest rates on hold this year despite rising inflation because the energy shock will be “transitory” while a weak UK jobs market constrains price pressures, the Organization for Economic Cooperation and Development expects.

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In its latest set of forecasts, the advanced economies’ think tank said the BOE would cut rates a quarter point to 3.5% in 2027, despite inflation remaining above the 2% target. Its gross domestic product forecasts were little changed from March, with growth upgraded to 0.9% this year from 0.7% but downgraded to 1.1% in 2027 from 1.3%. It sees the UK remaining the third-fastest-growing G7 economy after the US and Canada this year.

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The OECD urged the government to press ahead with fiscal consolidation and ensure any support for households during the energy shock is targeted as the national debt continues to balloon, rising to a projected 105.4% of GDP in 2027 from 98.8% in 2023, the year before Labour came to power.

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The OECD said Britain remains more exposed to inflation than any other G7 economy, with consumer price growth averaging 3.7% this year and 2.4% the next — slightly below projections issued in March, just after the conflict in the Middle East began. Inflation will “squeeze real incomes and exacerbate uncertainty, weighing on private consumption and investment.” 

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Unemployment will hit 5.5% this year, up from 5%, before dropping back to 5.3% in 2027, the OECD said.

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Despite rising inflation this year the BOE should “look through” it, rather than react with higher rates. It should also continue to sell assets from its balance sheet under quantitative tightening at the current £70 billion ($94.4 billion) yearly run-off rate in 2027.

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The OECD forecasts put it at odds with current market expectations of a quarter-point rise in interest rates by September. One of the Monetary Policy Committee’s hawks, Megan Greene, suggested on Tuesday that she could soon join Chief Economist Huw Pill in voting for rate hikes, even as Governor Andrew Bailey and several other colleagues argue that they have time to wait and see how the Iran conflict pans out before making a move. 

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The OECD expects central banks in the euro area and Australia to raise rates, while the US Federal Reserve holds steady, in a sign that global policymakers may again start to diverge this year.

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“Further easing in monetary policy is expected, with the Bank of England looking through the energy shock in 2026 and moving to a neutral stance in 2027 as underlying price pressures ease,” the OECD said. “Fiscal policy will remain restrictive, given elevated borrowing costs, high debt interest payments and rising public debt.”

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It also urged the government to “reduce vulnerability to imported energy price inflation” by strengthening energy security. “Correcting price signals that slow electrification, accelerating the expansion of grid capacity and strengthening short-term flexibility would enable clean generation to displace natural gas reliably,” it said.

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