OECD Warns UK to Keep Borrowing Costs High Until Inflation Eases and Remains Stable
The Organisation for Economic Co-operation and Development (OECD), a leading global economic authority, has cautioned the UK against lowering borrowing costs until the rate of inflation reduces and stabilizes. According to the OECD, the current interest rate of 5.25%, which is the highest since 2008, should remain in place.
In its economic outlook report for 2024, the OECD stated, “The fiscal and monetary policy mix is adequately restrictive and should remain so until inflation returns durably to target.” This statement supports the approach taken by the Bank of England, whose stance on inflation has not hinted at an imminent rate cut.
The report also predicts a sluggish growth for the UK economy, with a projected gross domestic product (GDP) growth of 0.4% this year and 1% in 2025. However, there is some positive news for UK workers, as the OECD expects “stronger” wage growth when accounting for inflation. This, in turn, will lead to a “modest pick-up” in household consumption.
Despite this, the OECD anticipates a continued rise in prices, with inflation expected to remain “elevated” at 3.3% in 2024 and 2.5% in 2025 – above the Bank of England’s target of 2%. These projections further support the notion that the Bank may keep interest rates higher for a longer period to reduce the flow of money in the economy and curb inflation. The OECD also adds that a rate cut is not likely until at least August.
If the forecasts for inflation hold true, the UK will still fare better than other G20 countries, a group of industrialized nations, in terms of inflation. The average inflation rate among these nations is expected to be 5.9% this year and 3.6% next year.
