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Pantheon Macroeconomics are predicting that the Bank of England could stop cutting interest rates at 4% instead of 3.75%.
The economists at the firm said this is due to a “markedly higher defence spending” amid the US President’s demands to NATO allies.
The firm is expecting Sir Keir Starmer to raise the UK’s defence spending to 3% of gross domestic product (GDP) following his announcement to MPs on raising spending for the military to 2.5% by 2027.
Pantheon believes that this could concern the BoE’s Monetary Policy Committee (MPC).
Sky News reported they said, “Another 0.5%-of-GDP or more hike in defence spending over three years would require a large and rapid shift in resources from private consumption and investment to government spending.
The MPC would likely also need to hold interest rates higher than otherwise to suppress inflation, with taxes unlikely to do the full job of reallocating resources.
We expect the MPC to stop cutting Bank rate at 4.0%, compared to 3.75% previously.
“Uncertainty surrounding this call is obviously extremely high, but a forecast of markedly higher defence spending must raise our Bank rate call.
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