The Bank of England will stop cutting the base rate this year at 4% rather than the widely expected 3.75%, a respected firm of economists is forecasting. 

Pantheon Macroeconomics says “markedly higher defence spending” by the UK – in response to demands by US President Donald Trump and geopolitical events worldwide – for the change in interest rate expectations. 

It expects the government to eventually raise defence spending to at least 3% of GDP, after the prime minister confirmed it will increase to 2.5% by 2027. 

Pantheon says this will give a modest long-term boost for the UK economy but may also be eaten up by inflation – a key concern for rate-setters on the Bank’s Monetary Policy Committee.

Penthon says: “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.”