Interest rates are set to fall three times by the middle of next year bringing the rate down to 3.75%, according to the Office for Budget Responsibility.
The current Bank of England base rate is 4.5% after three quarter-point cuts since August.
But the public finances watchdog said in its latest report that “interest rate expectations have risen” since its October Budget forecast.
It says: “Bank rate is expected to fall from its current level of 4.5% to 3.8% from mid-2026 onwards. Expectations are, on average, around a 0.25% higher than in the October forecast.”
This is broadly in line with money market forecasts, which are betting on two rate cuts by the end of the year, with three at the outside.
Inflation fell unexpectedly to 2.8% in February, according to official data yesterday.
This has increased the chances of an interest rate cut in May to around 54%, according to the latest market pricing, moving from August before the data was released.
However, the OBR said that “significant uncertainty continues to surround recent economic developments in the UK”.
It partly blames technical “data measurement and volatility”.
But also, expected energy price rise later this year and noted the prospects of a global tariff war, sparked by US President Trump.
Last night the US announced new import taxes of 25% on cars and car parts coming into America.
This comes on top of steel and aluminium taxes on importers imposed earlier this month among other measures.
The OBR said: “The global economic policy environment has been changing from day to day in the run-up to this forecast.
“Since October, market expectations for interest rates have been volatile across advanced economies, underscoring the continued uncertainty around the monetary and fiscal policy outlook.”
