Inflation to rise to 3.2% for 2025 as growth forecast slashed – OBR

UK economic growth forecasts have been slashed in half for this year as inflation increases more sharply, according to the fiscal watchdog.

The Government’s official forecaster has also warned that interest rates are set to stay higher for longer and that unemployment will rise beyond previous projections.

The Office for Budget Responsibility (OBR) said on Wednesday that it expects UK gross domestic product (GDP) to rise by 1% in 2025.

But the OBR upgraded the growth forecasts it previously set in October last year for the four years from 2026.

It now expects the economy to grow by 1.9% in 2026, 1.8% in 2027, 1.7% in 2028, and 1.8% in 2029.

The fresh predictions came as the Chancellor blamed “increased global uncertainty” for impacting on the economy.

Earlier on Wednesday, the Office for National Statistics (ONS) revealed that inflation slowed to 2.8% in February, although the Bank of England still expects inflation to peak at around 3.7% in September this year.

The OBR has forecast that inflation will slow significantly in 2026 to 2.1% – below its original prediction from October last year.

It said this slowdown will be driven by an easing of energy prices and weaker wage growth.

The OBR’s latest report also indicated that the UK’s base interest rate – which is set by the Bank of England – is set to remain higher for longer, compared with previous predictions.

It said the base rate – which currently sits at 4.5% – is expected to drop to around 3.8% in 2026 and remain at this level. It previously suggested rates would drop to 3.5%.

Higher borrowing costs linked to interest rates will continue to put pressure on the state finances through increased debt interest payments.

Government borrowing is expected to remain high to help balance the books over the coming years, with the OBR upgrading borrowing expectations for the rest of the forecast period.

The Chancellor said she will keep a fiscal headroom to £9.9 billion by 2029-30 following the spring statement, after finding around £14 billion extra through spending cuts to address pressure from increased borrowing costs.

Nevertheless, economists have suggested there could still be some uncertainty over whether the Government will meet its fiscal rules in the longer-term due to the narrow level of headroom.

Pantheon Macroeconomics chief UK economist Rob Wood said the forecasts show that the “fiscal outlook remains perilous”.

“So further tax hikes and borrowing are coming.”

Ian Stewart, chief economist at Deloitte, said: “Despite a major downgrade to the OBR’s growth forecast, the Government is on track to meet its fiscal targets.

“But doing so will require a rapid recovery in productivity growth, further spending cuts for some departments towards the end of this parliament and for the UK to avoid the challenging effects of tariffs.

“A lot needs to go right to meet what are very demanding fiscal targets.”