U.K.'s NIESR Urges BOE to Raise Key Rate to Around 5%

By Paul Hannon

The Bank of England should raise its key interest rate to around 5% if it is to succeed in taming inflation within the coming three years, the U.K.'s National Institute of Economic and Social Research said Wednesday.

The BOE last week lifted its key rate to 4% from 3.75%, its first move since the start of the war between the U.S. and Iran pushed energy prices sharply higher.

The central bank signaled that one more rate rise was likely, and pushed back against market expectations that it would hike its key rate to 5% by the end of next year.

But in its quarterly economic forecast, the U.K.'s leading economic think tank said investors were right to see such a large move as necessary, and policymakers are set to move too slowly.

"One further quarter-point rise in Bank Rate is unlikely to be enough, and the longer the Monetary Policy Committee waits, the more it will eventually need to do," said David Aikman, director of NIESR.

With energy prices staying high for longer than NIESR had expected in July, it now sees the U.K.'s annual rate of inflation peaking at 4.4% in February.

If the BOE raises its key rate to 4.25% and leaves it there, NIESR expects inflation to return to the 2% target only in 2030.

Around three-quarters of U.K. pay deals are negotiated in the early months of the calendar year, and the research body's economists expect workers to press for big rises to compensate for high inflation in early 2027. That would in turn prompt businesses to raise their prices to cover their increased costs.

"Second-round effects are now much more likely," they wrote.

Raising the key rate to 5% would bring inflation down to target 18 months earlier, the NIESR economists calculated. However, it would slow the economic growth rate in both 2028 and 2029 by 0.4 percentage points.

"Allowing higher inflation to become embedded in wage and price setting would cost more later," the economists wrote.

Write to Paul Hannon at paul.hannon@wsj.com

(END) Dow Jones Newswires

November 10, 2026 19:15 ET (00:15 GMT)