STEPHANIE FLANDERS: The interest rate and inflation bombshells in Osborne's plans ahead of next year's election
George Osborne didn’t have much spare cash to give away in his Autumn Statement. But the forecasts that went with his speech gave away plenty about the future shape of the recovery – with important implications for UK households and investors.
Many pundits say the tax and spending plans after 2015 are implausible, because they would take spending on public services to its lowest point as a share of the economy since the 1930s.
If you haven’t decided what you think about it, don’t worry. You have six months to ponder. The tax and spending plans of the major parties will be the central talking point for the parties between now and May’s general election.
Plenty to ponder: The tax and spending plans of the major parties will be the central talking point for the parties between now and May’s general election
But there are other parts of the forecast that people familiar with Britain’s economic history would find equally hard to believe.
Most striking is the forecast for inflation. The Office for Budget Responsibility now predicts that inflation will be well below the Bank of England’s target of 2 per cent, not just in 2014 and 2015 but in 2016 as well.
That is a big change from its last forecast back in March, and reflects quite how much the global inflation picture has changed since the summer.
There is much talk about deflation – falling prices – in the eurozone. But the big fall in the world oil price has forecasters slashing their inflation predictions around the developed world.
On current trends, 2015 could be the first year since the Bank of England became independent that the Governor has been forced to write to the Chancellor explaining why inflation is below 1 per cent.
Pressure: On current trends, 2015 could be the first year since the Bank of England became independent that the Governor Mark Carney has been forced to write to the Chancellor explaining why inflation is below 1 per cent.
That leads directly to the second fact about the new forecasts that ought still to shock: the outlook for UK interest rates.
Like most city economists, the OBR was expecting the Bank of England to raise interest rates in early 2015, with the key policy rate moving from 0.5 per cent to 2 per cent by the start of 2017. Now the OBR is assuming that the first rate rise will come late in 2015, and that rates will be below 2 per cent for a further two years, reaching 2.2 per cent only by the start of 2020.
All that has made things a bit easier for the Chancellor, because it knocks tens of billions of pounds off the cost of servicing the Government’s debt. It should also keep mortgage rates low for homeowners.
The OBR reckons that long-term interest rates will stay below 3 per cent right through to 2018. At that point, the unemployment rate is forecast to be only 5.3 per cent.
Stephanie Flanders: 'So far, however, this global recovery has not followed the usual rules. We may well get a rate rise or two in the UK and the US next year'
It says something about the tortuous path of Britain’s recovery that the Government’s official forecasters believe we will still be reliant on cheap money, so many years after the formal end of the recession in 2009.
The last time Britain had an unemployment rate of 5.3 per cent was in February 2008. Back then, the Bank of England’s headline rate was above 5 per cent.
Historically, wages have picked up quite sharply at such low levels of unemployment. If that happens in 2015, without a big improvement in productivity to go with it, then the Bank of England and the US central bank might have to increase rates sooner than people think.
So far, however, this global recovery has not followed the usual rules. We may well get a rate rise or two in the UK and the US next year.
But with central banks in Europe and Japan needing to do more to support growth, the betting is that inflation and interest rates will be well below the norm for several years to come, and the UK’s economy will not grow fast enough to make up the ground we have lost since 2008.
If so, the OBR’s astonishing forecasts may yet come true. But we shouldn’t forget to be surprised, and more than a little bit disappointed.
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