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Bank of England urged to hike interest rates from four to five per cent
The National Institute of Economic and Social Research (Niesr) has urged the Bank of England to raise interest rates to five per cent, warning that inflation could remain above target for years. It argues that acting sooner may limit the economic damage from persistent price rises and prevent higher inflation feeding into wage demands.
Niesr says inflation may peak above four per cent as about three quarters of UK workers agree pay settlements in the first three months of next year. The Bank forecasts a peak of 4.9 per cent by July next year and a return to its two per cent target in 2028, assuming energy prices fall; Niesr warns two further rate rises may not be enough. It estimates rates reaching 4.75 per cent could reduce GDP growth by 0.4 percentage points in 2028 and 2029, while higher debt costs could leave Chancellor John Healey up to £30bn short of meeting fiscal rules if he increases defence and care spending.
In short
- Niesr says rates should rise to five per cent.
- It warns inflation could stay above target for years.
- Higher borrowing costs could weigh on growth and public finances.
Steelman: both sides, in good faith
The strongest fair case each way — we don't pick a winner.
The case for
Niesr’s case is that inflation staying above target for years could entrench price rises in wage setting and expectations, making it harder and more damaging to bring inflation down later. Raising rates sooner may curb demand and limit that risk, even if it slows growth in the near term.
The case against
Higher rates would increase borrowing costs for households, businesses and the government, while the reported estimates suggest they could also weaken growth and leave less room for public spending. If inflation falls as the Bank expects, further tightening could impose those costs without being necessary to return inflation to target.
Explained simply
The Bank of England sets the UK’s main interest rate, which affects borrowing costs for households and businesses and the rates paid on some savings. It aims to keep inflation, the rate at which prices rise, close to 2 per cent.
The National Institute of Economic and Social Research is an independent economic research organisation. It studies issues such as inflation, wages and economic growth, while the Bank makes its own forecasts and decides interest rates.
Higher rates can help slow price rises by making borrowing more expensive, but they can also weigh on spending and growth. They also affect the government’s borrowing costs, which can make it harder to meet spending and budget plans.