Interest rates to hit 3% in 2025 predicts leading economic consultancy

Although economic activity has picked up since the start of the year, the outlook remains weak by historical standards according to KPMG.

GDP growth is forecast at 0.3% in 2024, accelerating to 0.9% in 2025, with longer-term economic growth expected to reach just 1% this decade, according to the consultancy’s latest UK economic outlook.

Inflation is expected to return to its 2% target in the first half of this year, which should pave the way for interest rate cuts from the summer.  

Interest rates are forecast to fall by 100 basis points this year, settling at 3% in the second half of 2025.

KPMG says falling interest rates could spur partial recovery in liquidity conditions, with accumulated ‘dry powder’ aiding a bounce-back in private equity deals. However, the deterioration in access to finance pre-dates the current interest rate cycle and funding costs are expected to remain above earlier lows.

So, while short-term recovery in liquidity conditions is on the cards, longer-term issues may be more persistent.

There are ongoing signs that the labour market is softening, with employers hesitant to commit to new hires. However, a lower participation rate - due to adverse population trends and a larger proportion of the population actively choosing not to look for work - could leave the supply of labour relatively low. 

Pay growth is expected to ease but to outstrip inflation, at 4.5% in 2024 and 3.7% in 2025, according to KPMG’s latest projections.

Yael Selfin, Chief Economist at KPMG UK, comments: “The UK economy is recovering from the shallow recession registered in the second half of last year. 

“Business surveys are consistent with a reacceleration of growth, households are rebuilding their purchasing power, and consumer confidence is expected to bounce back. 

“However, persistent weakness in the economy’s supply potential will prevent growth from exceeding 0.2-0.3% per quarter.”