It came as economists at Europe’s second-largest bank, BNP Paribas, warned that inflation will be higher and “bumpier” in the years to come.
They cited factors such as deglobalisation, the transition to net zero and greater geopolitical instability.
Matthew Swannell, a BNP economist covering Europe and the UK, said: “The world is likely, all else equal, more inflationary.
“The consequence of that is that the neutral rate is higher because central banks will always work to keep inflation at 2pc.
“All these things – loser fiscal policy whether it be through defence, changing political preference, demographics, increased investment to improve corporate balance sheets – that all is a higher neutral rate story.”
Higher defence spending also has the potential to push up interest rates if it means governments borrow more than they otherwise would, he said.
Both Rishi Sunak and Keir Starmer have said they want to increase defence spending to 2.5pc of GDP, although the Labour leader has not set out a timeframe for doing so.
Inflation has eased significantly from a high of 11.1pc in October 2022 to 2.3pc last month, but many investors are no longer convinced rates will return to the lows of the post-financial crisis era.
Orla Garvey, a senior fixed-income portfolio manager at the $758bn (£599bn) asset manager Federated Hermes, said: “Inflation will be more volatile in the future because of the need for greater spending on things like defence. That will tend to make inflation bumpy.”
Robert Johnson is a UK-based business writer specializing in finance and entrepreneurship. With an eye for market trends and a keen interest in the corporate world, he offers readers valuable insights into business developments.
