The UK is set for sturdy growth of 1.5% this year, but wage and tax rises mean the Bank of England will only have room for one more rate cut in 2025, says the National Institute of Economic and Social Research.
The thinktank says the UK economy will rise by economy is for 1.5% this year, driven by around £70bn of extra public spending announced by Chancellor Rachel Reeves in the October Budget, combined with “a modest increase” in business investment.
It expects inflation will peak at about 3.2% in the first half of the year before “gradually” falling back to the Bank’s 2% target.
The cost of living will average around 2.4% through 2025, according to the body’s Winter Outlook.
But it adds that rate-setters at the Bank’s Monetary Policy Committee will only be able to manage one further cut rate this year, “as the effects of continued real wage growth, fiscal expansion and exchange rate depreciation limit the scope for monetary loosening”.
The report comes after the central bank cut the base rate by 0.25% cut to 4.5% last Thursday.
But it made gloomier forecasts than the thinktank.
The Bank slashed its 2025 growth forecasts made in November to 0.75% from 1.5% and predicted that inflation will rise from its current 2.5% level to 3.7% in the third quarter of this year, driven by an expected rise in energy costs.
The National Institute of Economic and Social Research said its analysis placed less emphasis on global trade uncertainty caused by the prospect of a tariff war and weak domestic business sentiment than the Bank.
The body also expected the Chancellor will meet her fiscal rules when she presents the government’s Autumn Statement on 26 March.
National Institute of Economic and Social Research deputy director for public policy Adrian Pabst says: “While the government is likely to meet its new fiscal rules, there will be no space for extra expenditure in response to a shock or the need for higher public investment to get growth going for as long as the self-imposed constraints on tax remain in place.”
Last week, Bank of England governor Andrew Bailey reiterated his stance that further rate cuts would be “gradual and careful” due to a more uncertain global trading environment.
Goldman Sachs predicts the Bank of England will cut Bank rate four times this year in a bid to keep the UK economy moving.
