The National Institute of Economic and Social Research (NIESR) stated on Wednesday, November 11, 2026, that interest rates should rise to 5% to manage inflation. In its latest economic forecast, the think tank argued that both the Bank of England and the UK government are postponing decisions on monetary and fiscal policy, which could lead to prolonged price instability.
This report follows the Bank of England's decision last week to raise interest rates to 4%, the first increase in more than three years. While NIESR expects the central bank to implement one more rate hike, it warned that this would not be enough and failing to reach 5% would delay the return of inflation to its 2% target until late 2030. The think tank also stated that major spending commitments for defense, social care, and disability remain unfunded.
According to NIESR, Consumer Prices Index (CPI) inflation is now projected to peak at approximately 4.4% in February, an increase from the 3.8% peak predicted in July. The researchers noted that the UK’s fiscal headroom fell to £14.5 billion from £23.6 billion. The report forecast UK gross domestic product (GDP) growth at 1.6% for 2026 but expects it to slow to 1.1% in 2027.
The scale of the fiscal risk involves approximately £30 billion. NIESR reported that if the government’s current spending plans deviate at the same rate as previous plans, the UK will miss its fiscal rules by that amount. This follows the autumn Budget where Chancellor John Healey confirmed that debt interest costs for the past year contributed to a reduction in fiscal headroom to £14.5 billion. For the average household, these macro-level shifts translate to "second-round" inflation effects expected early next year, when businesses are projected to set wages and prices to compensate for rising costs.
NIESR argued that by delaying tax reforms or spending cuts now, the government is increasing the likelihood of sharper future interest rate hikes or missed fiscal targets. Companies are expected to finalize their 2027 wage and price structures early next year, which NIESR identified as a critical window for observing whether inflation becomes embedded in the economy.