OBR warns “wage spiral” could force interest rates to 3.5 PERCENT

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OBR warns Bank of England could be forced to raise interest rates to 3.5%, which would increase costs for mortgage lenders if a ‘wage spiral’ or supply chain chaos was pushing inflation to a peak of 5.4% next year

  • Chancellor Rishi Sunak unveiled his budget with public spending and lower borrowing thanks to growth
  • OBR improved economy expectations after better-than-expected pandemic rebound
  • Watchdog said the central forecast for CPI inflation should peak at 4.4%, but recent evidence suggests a rise
  • The OBR put forward two scenarios in which a “wage spiral” or supply chaos brings inflation to 5.4%

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The government watchdog today warned that a “wage spiral” or energy shock could drive inflation to a three-decade high of 5.4% next year and force the Bank of England to take drastic measures.

In a harsh assessment alongside the budget, the Office for Budget Responsibility (OBR) said its central forecast is that the headline CPI will peak at 4.4% in the second quarter of the year.

This is well above the current 3.1% and more than double the Bank’s 2% target.

But he cautioned that data since the document’s preparation suggests that a figure of 5 percent may be more realistic.

The watchdog has put forward two scenarios in which the situation could worsen dramatically – either with the development of a “moderate wage spiral” or with continued pressure on energy and commodity prices.

Either way, CPI inflation could reach 5.4%, with the OBR indicating that the Bank of England base rate is expected to skyrocket to 3.5% from the low of 0, 1% currently.

Rishi Sunak

The OBR has said that in its scenarios where a “wage spiral” develops or commodity prices continue to rise, Bank of England Governor Andrew Bailey (left) should raise the base rate at 3.5%, against 0.1% currently.

In both scenarios, CPI inflation could reach 5.4%, with the OBR indicating that the Bank of England base rate is expected to soar to 3.5% from the low of 0, 1% currently.

In both scenarios, CPI inflation could reach 5.4%, with the OBR indicating that the Bank of England base rate is expected to soar to 3.5% from the low of 0, 1% currently.

In a harsh assessment alongside the budget, the Office for Budget Responsibility (OBR) said its central forecast is that the headline CPI will peak at 4.4% in the second quarter of the year.

In a harsh assessment alongside the budget, the Office for Budget Responsibility (OBR) said its central forecast is that the headline CPI will peak at 4.4% in the second quarter of the year.

Net public sector borrowing will be lower than forecast in March, thanks to improving overall economic situation

Net public sector borrowing will be lower than forecast in March, thanks to improving overall economic situation

Such a change would cause tremendous pain to homeowners who would face huge mortgage costs.

But there would also be “tax consequences” for the government, as the debt service bill of £ 2.2 trillion would rise.

The OBR said: “In both scenarios, a further sharp and persistent increase in costs means that inflation peaks at 5.4% (1 percentage point above our central forecast and the highest rate in three decades) then falls more slowly than in our central forecast.

“Based on a simple monetary policy rule, the discount rate in our scenario reaches 3.5% (its highest since November 2008), thus suppressing demand and moderating inflationary pressures, but even so, it it takes another year for inflation to return to target. than in our central forecast.

“At its peak, the impact of this vigorous monetary tightening prevents a further 2-3 percentage point rise in inflation, and without it, the price level would be 6-8% higher by the end of the year. scenario.”

The central OBR forecast improved growth for this year from the 4% suggested in March to 6.5% – less than some had hoped, but enough to return to pre-Covid activity levels.

Next year, GDP is expected to be 6 percent, lower than the 7.3 percent in the latest set of figures.

Critically, the “scars” – the long-term damage to the economy – are now only estimated at 2 percent instead of 3 percent.

The watchdog also now predicts that unemployment will peak at 5.2%, a fraction of what was expected at the height of the crisis.

“Today’s budget does not draw a line under Covid. We have difficult months ahead, ”said Mr. Sunak.

“But today’s budget begins the work of preparing for a new post-Covid economy.”

Public sector debt not growing as high according to latest OBR projections

Public sector debt not growing as high according to latest OBR projections

The tax burden reaches its highest level since World War II, despite Rishi Sunak's promise to reduce it

The tax burden reaches its highest level since World War II, despite Rishi Sunak’s promise to reduce it

Public spending will continue to be higher than it was before the pandemic as a share of GDP

Public spending will continue to be higher than it was before the pandemic as a share of GDP

Scenarios with huge increase in inflation would have ripple effects on the entire economy, OBR said

Scenarios with huge increase in inflation would have ripple effects on the entire economy, OBR said

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