NIESR Cuts UK Growth Forecast, Warns Iran War Will Keep Inflation Above Target Until 2028

Key Takeaways

• NIESR trims 2026 UK growth to 0.9%, 2027 to 1.0%.
• Inflation projected to hit 4.1% early 2027, 2% target delayed to 2028.
• BoE likely to raise rates once to 4% in July 2026.
• Adverse oil price scenario could push rates to 5.25% and trigger recession.
• Chancellor Reeves may need primary budget surpluses, last seen in 2001.

Pulse Analysis

The latest NIESR forecast underscores the fragility of the UK’s post‑pandemic recovery. By attributing the downgrade to soaring oil and gas prices linked to the Iran conflict, the think‑tank signals that external energy shocks remain a potent drag on domestic demand. Higher input costs are feeding through to consumer prices, pushing inflation above 4% and postponing the Bank of England’s 2% target until at least 2028. This outlook diverges sharply from market expectations that had priced in multiple rate hikes this year.

Monetary policy implications are immediate. While NIESR’s baseline calls for a modest 25‑basis‑point increase to 4% in July, its stress scenario envisions a rapid climb to 5.25% if oil prices stay elevated. Such a tightening path would raise borrowing costs for households with mortgages and for businesses seeking credit, potentially deepening the slowdown. Investors and analysts will watch the BoE’s upcoming forecast release closely, as any deviation from the single‑hike view could reshape bond yields and the pound’s trajectory.

On the fiscal front, the institute’s warning to Chancellor Rachel Reeves adds another layer of pressure. Achieving primary budget surpluses—a feat not seen since 2001—would require either higher taxes, reduced spending, or a combination of both, all of which could further strain an already delicate recovery. Policymakers must balance the need to rein in debt with the risk of choking consumer spending, especially as energy‑price volatility persists. Coordinated monetary‑fiscal action will be essential to steer the UK back toward sustainable growth and price stability.