Energy shock impact is less severe than sluggish employment. The OECD predicts that the Bank of England will hold steady this year and cut interest rates in 2027.

The Organization for Economic Cooperation and Development (OECD) expects that despite rising inflation, the Bank of England will keep its benchmark interest rate unchanged this year. This is mainly due to the temporary nature of the inflationary impact of energy costs, and the long-standing weak employment market in the UK will restrain pressure on price growth. In its latest set of forecasts, the OECD, known as the "think tank for developed economies," states that despite inflation remaining above the 2% target, the Bank of England will cut interest rates by 25 basis points to 3.5% in 2027. Its Gross Domestic Product forecast has remained almost unchanged from March, with this year's growth outlook slightly raised from 0.7% to 0.9%, but the 2027 growth rate has been slightly lowered from 1.3% to 1.1%. The organization believes that under temporary inflation and limited stimulus policies, the UK will still be the third fastest-growing economy in the G7 group this year, only behind the US and Canada. The OECD urges the UK government to proceed with fiscal consolidation and ensure that any support for UK households during the energy shock is targeted; as national debt continues to grow, the OECD predicts that the debt-to-GDP ratio will increase significantly from 98.8% in 2023, the year before the Labour Party came to power, to 105.4% in 2027. The OECD states that the UK is more susceptible to the negative effects of inflation than any other G7 economy and predicts that average consumer price inflation will be 3.7% this year, dropping to 2.4% next year - slightly lower than the forecast released in March when the Middle East geopolitical conflict had just begun. The OECD says that inflation will "squeeze real incomes in the UK and exacerbate uncertainty, hampering private consumption and investment." The OECD predicts that the UK unemployment rate will rise from 5% this year to 5.5%, then slightly fall to 5.3% in 2027. The OECD believes that the Bank of England should see through the impact of inflation this year, rather than reacting by raising interest rates. The Bank of England should continue to reduce its balance sheet by 70 billion (about $94.4 billion) annually in 2027 through quantitative tightening, accelerating the sale of assets on its balance sheet. The OECD's forecast differs from current market expectations, which predict a 25 basis point rate hike by September. One of the hawks on the Bank of England's Monetary Policy Committee, Megan Greene, hinted on Tuesday that she may soon join the camp led by the Bank of England's Chief Economist Huw Pill, voting for a rate hike, although Bank of England Governor Andrew Bailey and several colleagues insist they have time to wait and see how the energy inflation impact of the Iran conflict develops before taking action. The OECD predicts that the Eurozone and the Reserve Bank of Australia will soon adopt rate hikes, while the Federal Reserve will maintain its rates long-term, indicating that global policymakers may begin to diverge again this year. On the other hand, interest rate futures traders seem more aggressive, with the "FedWatch tool" showing that traders are betting on a 25 basis point rate hike by the Fed in December this year, with the probability of a rate hike almost reaching 100%. The OECD states: "Monetary policy is expected to be further eased as the Bank of England sees through the energy shock in 2026 and switches to a neutral stance in 2027 as potential price pressures ease." "Given high borrowing costs, high debt interest payments, and rising public debt, fiscal stimulus policies will remain restrictive." The organization also urges the government to enhance energy security to "reduce long-term vulnerability to imported energy price inflation." The OECD says: "Correcting price signals that hinder electrification, accelerating grid capacity expansion, and enhancing short-term energy composition flexibility will enable clean electricity to reliably replace natural gas supply."