Think tank forecasts just two more rate reductions until mid-2026, limiting further relief for mortgage borrowers
The Bank of England is expected to cut interest rates only twice more before ending its easing cycle in the second quarter of 2026, leaving bank rate at 3.5% for the medium term, according to the Organisation for Economic Co-operation and Development (OECD). For mortgage professionals, the outlook points to a stable but only mildly supportive rate environment after mid-2026.
In its latest projections, the Paris-based body said the UK would grow faster than France, Germany and Italy over the next few years, but warned that higher taxes and tight public spending would limit household income and consumption. It forecasts UK output of about 1.4% this year, 1.2% in 2026 and 1.3% in 2027, placing Britain in the middle of the G7 pack, behind the US and, from 2026, Canada.
The OECD sees the UK’s rate path converging towards a “neutral” level, close to where policy is neither stimulating nor restraining activity. That implies the sharp repricing in borrowing costs seen since the pandemic has largely run its course. Hopes of a more aggressive cutting cycle that might deliver a stronger rebound in housing activity are not reflected in its central scenario.
The think tank has revised down its inflation forecast for next year, expecting consumer price growth to edge closer to the bank’s 2% target after averaging around 3.5% this year, the highest in the G7. It said the current 3.6% rate should prove “transitory” as higher taxes slow growth and push unemployment higher, and as recent measures to lower energy and fuel costs take effect.
The OECD expects joblessness to rise to 4.9% in 2026 and 5% in 2027. For lenders, the combination of softer wage growth, a modest rise in unemployment and gradually easing inflation reinforces the need to monitor affordability and arrears risk, even as headline rates drift down and then level off.
Fiscal policy is expected to act as a clear drag on demand. The organisation said that “fiscal consolidation will be a headwind to the economy, with past tax and spending adjustments weighing on household disposable income and slowing consumption”.
Chancellor Rachel Reeves’ recent Budget contained about £26 billion of tax increases, including a continued freeze on income tax thresholds that will draw more people into higher bands and push the tax burden to a record share of national income.
The OECD said the budget deficit should narrow “substantially”, but warned that there are “substantial downside risks to growth and upside risks to inflation”, and urged caution over future changes to tax and spending. It added that measures should aim to lift long-term growth potential, alongside reforms such as the overhaul of infrastructure planning and the simplification of financial services regulation.
For the mortgage market, the OECD’s central case suggests a period of steady but unspectacular activity: bank rate easing towards 3.5% and then holding, real incomes under pressure from tax and spending decisions, and a labour market that is softening rather than collapsing. Lenders are likely to maintain a cautious stance on pricing and criteria, while borrowers continue to face tighter affordability tests than in the pre-pandemic era, even as inflation moves closer to target.
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