NIESR says the Bank of England should lift rates to around 5% and sees inflation above target until 2030

The National Institute of Economic and Social Research said Bank of England policymakers were set to move too slowly, and urged them to raise the key rate to around 5% to tame inflation within three years¹. The think tank forecast that the Bank will not succeed in returning inflation to target before 2030^2,4, which would leave UK inflation above the Bank’s target for the next four years³.

NIESR said the overshoot would be driven by second-round effects on wages caused by the Iran war⁷. It described last week’s rate rise as timid and said the Bank’s response risks higher interest rates for longer⁵.

Why it matters to investors

The think tank’s argument is about timing as much as level. In its view, a response that falls short now risks holding rates higher for longer⁵, while a quicker move to around 5% would aim to bring inflation back within three years¹. That puts NIESR at odds with the pace the Bank’s policymakers were set to follow¹.

NIESR’s diagnosis rests on wages. It expects second-round effects on pay from the Iran war to keep inflation above target until 2030, which is why it argues the Bank cannot wait for price pressures to fade on their own^2,7.

The warning comes as other central banks weigh faster tightening. In the US, Federal Reserve officials opened the door to a quicker round of rate hikes as inflation worsened⁷.

The wider outlook and what to watch

In its Economic Outlook, titled Decisions Deferred, NIESR forecast global growth of 3.1 per cent this year, up from 2.9 per cent⁶. The report also set out forecasts for GDP growth in 2028 and 2029, and weighed the costs of allowing higher inflation to persist⁶.

Three things will test the think tank’s case: whether the Bank quickens its pace after a rise that NIESR called timid⁵; whether wage data show the second-round effects it expects from the Iran war⁷; and how its call for a rate of around 5% compares with the path the Bank’s policymakers choose¹. NIESR’s forecasts are its own and are not a statement of Bank of England policy^1,2.