OECD report: Interest rates to fall slower and inflation set to rise next year after Labour Budget - impact on households?

The OECD’s forecast is grim: rising inflation and stubbornly high interest rates spell disaster for UK households. Mortgage costs will remain high, affordability will plummet and families already battling high food and energy prices will be crushed under the weight of rising living costs. The Labour Budget’s borrowing spree risks inflaming this toxic cycle, leaving the Bank of England little choice but to hike rates further, adding to the economic pain. This is a catastrophic outlook that threatens to deepen the cost-of-living crisis and cripple consumer and business confidence.

Inevitably this will mean that mortgage rates will continue to be expensive in the short term unless there is an obvious rationale for future rate cuts, which are more likely to influence the pricing of Swap rates and mortgage rates in general. The effects of the October Budget still need to be factored into our economy, but borrowers will again have to shoulder the financial burden of this government's blundering performance.

We just need an uneventful first quarter or so to gain stability. The chances of that are slim, though, with our current political system mirroring a Christmas Panto. Before the Budget, many economists were predicting that the base rate would fall to 3% by the end of next year. This has changed dramatically over the past few weeks. Now predictions are around 4%, namely a much slower decline throughout 2025. For borrowers, this means the road to recovery looks a little slower. But things should improve. Next year will see some of the dreaded Truss remortgages coming up for renewal and they’ll feel a benefit as they could drop from the 6’s to the 4’s. So for some, next year will provide some respite for the high bills they’ve been enduring.

Economic storm clouds continue to gather as the OECD predicts a worrying combination of rising inflation and sluggish growth for the UK. Despite efforts to curb rising prices, inflation has found a foothold in the UK economy, leaving households to navigate treacherous waters in 2025. While headline inflation has been trending towards the BoE's target, core inflation remains stubbornly high, with wage-driven price pressures persisting. This is likely to keep monetary policy restrictive, which while necessary to anchor inflation, could prolong the squeeze on household finances and dampen growth prospects. Furthermore, the UK's growth trajectory appears modest at best and fraught with risks, with limited fiscal space to confront possible shocks on the downside and higher domestic demand through the rundown of excess savings on the upside. Consequently, policymakers face a delicate balancing act, with the need to combat inflation without stifling growth, presenting a formidable challenge.