UK's NIESR nudges up growth forecast, warns of persistent inflation

LONDON, July 29 (Reuters) - Britain's economy has been more resilient than anticipated after the energy price shock caused by the Iran war, but inflation will stay above the Bank of England's target until 2029, according to projections from a leading think tank published a day before the ​Bank of England sets interest rates.

The National Institute of Economic and Social Research said on Wednesday that gross domestic product is forecast to expand at an annual rate of 1.1% in 2026, up from 0.9% in its previous forecast in April.

"The UK economy proved to be surprisingly resilient in the first half of this year, but a slowdown is still to come. Even if peace is restored relatively quickly in the Middle East, inflation will still rise and the new Chancellor will need to make some difficult decisions," said Stephen Millard, NIESR's deputy director for macroeconomics.

• NIESR also said the energy shock caused by the war has weakened the growth outlook and eroded most of the government's £24 billion of fiscal headroom

• Inflation is projected to average 3.1% in 2026, up from 2.6% in June. It is seen peaking at 3.8% in February 2027, down from 4.1% in April's forecast

• Inflation is expected to return to target in 2029, a year later than previously forecast

• Prime Minister Andy Burnham's commitments on defence and cost-of-living support for households should be funded through higher taxation or spending cuts, not borrowing

• GDP is projected to grow 0.4% in the three months to June, after expanding 0.6% in the first quarter of 2026

• The jobless rate is projected to peak at 5.3% in the first quarter of 2027, below the 5.5% in April's forecast

• The BoE is predicted to keep interest rates on hold this year and in 2027 but NIESR sees a case for increasing benchmark borrowing costs to 4% from 3.75% if energy prices rise further

(Reporting by Suban Abdulla; editing by David Milliken)