The National Institute of Economic and Social Research has criticized the Bank of England’s approach to combating inflation, arguing that recent monetary policy decisions are insufficient to address rising price pressures in the UK economy. The central bank raised its benchmark interest rate by a quarter percentage point to 4% last week, but the thinktank’s director David Aikman contends this incremental approach will prove inadequate.
Inflation currently stands at 3.5%, significantly above the Bank’s 2% target, driven primarily by elevated fuel costs stemming from geopolitical tensions. Oil prices surged following military action in the region, though crude has recently retreated from peaks above $100 per barrel. Despite the recent pullback in energy costs, the thinktank warns that structural issues in shipping and refining will cause consumer price declines to materialize gradually.
Aikman expressed concern that the timing of rate increases creates particular risk, with inflation projected to exceed 4% in the new year while most wage negotiations for 2027 are underway. This confluence creates conditions for workers to demand salary increases linked to inflation, potentially embedding higher price growth into the economy. The institute argues that a single additional quarter-point rate increase will be insufficient, and delays in tightening policy will ultimately require more aggressive action later.
The economic outlook has also dimmed, with the thinktank forecasting UK growth of 1.6% this year but only 0.9% in 2028 as high inflation, elevated interest rates, and constrained government spending weigh on economic activity. The institute additionally criticized recent fiscal decisions, suggesting the government has deferred necessary spending restraint. Aikman warned that financial markets could penalize the Treasury through higher borrowing costs if spending increases in areas such as defence proceed without corresponding savings elsewhere.
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