LONDON, Oct. 12 (Xinhua) -- The British economy faces lower growth, inflation and interest rate pressures, and uncertainty over investment and productivity, an economic forecast published Monday by the Institute for Fiscal Studies (IFS) said.
The economic backdrop to the upcoming autumn budget is more difficult than expected in spring, the report said. The near-term outlook will be dominated by developments in the Middle East, as the resulting energy price shock will squeeze household spending power.
The report forecast growth in Britain's inflation-adjusted gross domestic product at 1.4 percent in 2026, slowing to 1.2 percent in 2027 as higher prices and interest rates bite.
Inflation is set to remain above target through 2027, with consumer price inflation expected to average 3.1 percent this year and 3 percent in 2027 before returning to 2 percent in 2028, according to the forecast.
The report said that high inflation left the Bank of England facing a difficult trade-off. It forecast two quarter-point increases in the bank's benchmark interest rate, taking it to 4.25 percent by February 2027.
"In our view, a sharper tightening would do little to prevent the imminent energy-driven inflation peak but would weaken growth and employment," the report said. "In a high energy price scenario, we expect bank rate rises to as high as 4.75 percent next year."
The report acknowledged that investment and productivity improvements offer a route to stronger medium-term growth, but noted the outcome is highly uncertain.
Recent strength in business investment, particularly in information and communications technology and artificial intelligence-related activity, is encouraging, but if investment raises demand without broad productivity benefits, it would fuel more inflation and higher interest rates, the report said.
