Inflation and mortgage costs are set to be higher than expected due to the chancellor’s spending and borrowing plans, according to the budget watchdog.

Chancellor Rachel Reeves announced almost £70 billion of extra spending each year, funded by business-focused tax rises and additional borrowing, in her first autumn budget.

The Office for Budget Responsibility (OBR) said the big increase in spending would contribute to higher inflation in the short term, although it would also help spur stronger economic growth.

OBR member David Miles said: “The inflation profile is a little higher than it would have been if there had not been a fairly substantial increase in spending. »

Inflation is expected to remain above the Bank of England’s 2% target until 2029, according to the latest forecasts, which have revised upwards their forecasts for the next four years.

This means that inflation is expected to average 2.5% this year and 2.6% next year.

The official forecaster said inflation would then fall, assuming “the Bank of England responds” to help it reach the target rate.

The Bank of England has used higher interest rates in recent years to help bring down Britain’s inflation rate after it soared to 11.1% in 2022.

The interest rate, which helps dictate mortgage rates, currently sits at 5 percent, having last been cut in August by bank policymakers.

Mr Miles said the OBR’s new inflation forecasts and borrowing projections – predicting the Chancellor will increase borrowing by £32 billion a year – mean interest rates are likely to be 0, 25 percentage points higher than they otherwise would have been in future years.

As a result, the yield on UK government bonds, also known as gilts, rose by around 2% after the budget announcement.

Average mortgage rates are expected to rise from an average of 3.7% to 4.5% over the next three years, slightly above previous projections, according to the OBR.

The forecaster also said Britain’s economy was expected to grow more than expected this year and next, partly thanks to a boost from the Budget, although tax measures could hurt its long-term projections.

The OBR predicts that the UK’s gross domestic product (GDP) will increase by 1.1% in 2024.

This reflects an upward revision from its previous forecast of 0.8% and is higher than recent projections from the Organization for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF).

The UK economy is also on track to grow by 2% next year, ahead of a previously forecast rise of 1.9%.

The OBR said the new round of fiscal policies, which will see spending increase by almost £70 billion each year, “will provide a temporary boost to GDP”.

However, he said that this positive impact would “diminish to the point of disappearing” over the next five years.

New forecasts also show the economy is expected to grow 1.8% in 2026, 1.5% in 2027 and 1.5% again in 2028.

This represents a downward revision to expected economic growth, with the forecaster pointing to growth of 2% for 2026, 1.8% for 2027 and 1.7% for 2028 in the previous government’s spring budget statement. .

It came as Ms Reeves announced a £40 billion tax rise, including a £25 billion raid on employers’ social security contributions and a rise in tax on over- values.

The OBR said the tax increases would partly lead to a “crowding out” of business investment, which would have a negative impact of 0.2% on economic growth in the medium term.

The forecaster also said the latest financial policy measures are expected to leave the government with a reserve of £9.9 billion to balance the state’s finances by 2029/30.

This is significantly lower than the average margin of £28 billion available to previous chancellors and would not have been achieved without further changes to its fiscal debt rules.

The new forecasts also show that UK inflation is expected to be higher than expected over the next four years and remain above the Bank of England’s target rate.

Ms Reeves, presenting her first Budget, told Parliament on Wednesday that the forecaster predicted consumer price index (CPI) inflation would average 2.5% this year.

In its previous projections in March, the OBR predicted price growth of 2.2% for the year.

This comes as inflation fell to a three-year low of 1.7% in September after a sharp fall in petrol prices.

Ms Reeves also confirmed that the Government would maintain the Bank of England’s inflation target of 2%.

The central bank in August cut interest rates to 5% from a 16-year high of 5.25%, but higher-than-expected inflation could pressure expectations of even faster cost declines borrowing.

The OBR’s latest forecasts also indicate that inflation will reach 2.6% in 2025, significantly above the previously forecast rate of 1.5%.

It also increased projections for the following three years, with inflation expected to 2.3% for 2026, 2.1% for 2027 and 2.1% for 2028.