Interest rates won’t be cut until 2026

The Confederation of British Industry (CBI) does not expect the Bank of England to cut interest rates until 2026, predicting that the base rate will stay at 5.25% for at least two more years.

The CBI’s forecast is based on projections showing that consumer price inflation will not reach the Bank’s 2% target until Q3 2025. The business lobby group has warned that prolonged high interest rates will hit consumer spending and business investment, with this contributing to sluggish economic growth. The CBI expects the economy to grow 0.8% next year after expanding 0.6% in 2023.

Households will also contend with some loosening in the labour market, with the unemployment rate rising from its current level (4.2%). However, unemployment is set to peak at a still-historically low 5% in mid-2025, which means that the labour market will remain relatively tight.

Sluggish growth is expected to weigh on business investment, which is set to fall by 5% in 2024. Permanent full expensing for capital spending, as announced in November’s Autumn Budget, is expected to boost business investment beyond our forecast horizon, given that it replaces the temporary investment allowance which was set to expire in March 2026.

Alongside falling business investment in 2024, tepid growth in household incomes also leads to falling residential investment – taken together, the fall in total capital spending next year (-4.2%) is a key constraint to economic momentum.

GDP growth recovers in 2025, picking up to 1.6%. This reflects an easing of some of the brakes on activity, with inflation falling back further and the labour market stabilising. Firmer growth also lifts business investment, which grows by 2.7% over the year, setting the stage for a further boost from permanent full expensing beyond this horizon.

But despite the pick-up in GDP growth over 2025, it still remains below the average seen in the aftermath of the 2008/9 financial crisis (around 2%). Similarly, while productivity (output per worker) grows modestly over our forecast, it remains a substantial 21% below a continuation of its pre-crisis trend by the end of 2025.

Louise Hellem, chief economist at the CBI, said “Amid the sheer degree of headwinds that the economy has faced over the last couple of years, businesses and households have shown remarkable resilience. Let’s not forget that even the weak growth we’ve seen is better than expectations of a recession this time last year.

“But that is by no means job done. Businesses are gearing up for another tough year ahead, with our forecast expecting weak growth to persist over 2024. Given that this is coming after an already challenging few years, it’s clear that the 2020s have yet to roar.”

“With a general election around the corner, it’s imperative that consensus is maintained around growth-enhancing measures in the Autumn Budget. In particular, there must be no back-tracking on making full capital expensing permanent and encouraging announcements around speeding up planning and grid connectivity must be rolled out.”

“But aside from this, it’s clear that more also needs to be done to unlock the UK’s true growth potential. That includes building a long-term strategy that boosts competitiveness, honours our climate commitments, addresses labour shortages and renews the partnership between business and Government.”