The UK is set to experience the highest inflation rate among the advanced G7 economies in the current year
The Bank of England is expected to raise interest rates by 0.25 percentage points this week, while the European Central Bank has signaled a more cautious approach after a recent rate hike.
Inflation Projection Surpasses G7 Peers
According to the interim economic outlook report from the Organisation for Economic Co-operation and Development (OECD), it anticipates that the UK’s inflation rate for 2023 will average 7.2%. This represents an increase from its earlier projection in June, which stood at 6.9%. Notably, this elevated inflation rate is the swiftest among the G7 countries and ranks third-fastest within the broader G20 group.
The OECD has unveiled these updated predictions for its member nations at a time when economists are forecasting an uptick in the UK’s headline inflation rate in the coming week. A Reuters news agency poll suggests that the Consumer Prices Index (CPI) is poised to climb to an annual rate of 7% in August, up from July’s 6.8%, driven by a surge in global oil prices.
Comparing inflation rates between countries can be challenging due to variations in calculation methods. However, the OECD has adjusted its inflation projection for the UK in 2024, adding 0.1 percentage points but still anticipating a decrease to 2.9%.
The OECD has also maintained its earlier estimate that the UK’s economic growth for this year would be a modest 0.3%. If this projection materialises, it would mark the second-lowest growth rate among G7 nations, with only Germany expected to fare worse due to a recession.
The organisation foresees a rebound in economic growth for the UK the following year, but the expected rate stands at 0.8%, which still trails behind most G20 countries.
Global Economic Impact
The global economic outlook in the report suggested that worldwide economic growth would slow down. This slowdown is primarily attributed to two key factors: the impact of increasing interest rates to address inflation concerns and China’s decelerating economic growth.
The report forecasts that 2024 global economic growth is expected to decrease to 2.7%, a decline from the anticipated 3% growth in 2023. This deceleration is mainly due to rising borrowing costs and China’s economic slowdown, which significantly constrain global economic expansion.
Economists and financial markets anticipate that the Bank of England will likely raise interest rates by 0.25 percentage points this week. However, it’s expected that this will be the last rate increase for a while as the bank takes a breather.
In contrast, the European Central Bank recently increased its main deposit rate to a historic high but has signaled a more cautious and wait-and-see approach in its future actions.
