Economic Forecast and Its Impact on Mortgage Rates
The recent economic forecast has left many wondering what it means for mortgage rates. The Bank of England is set to make its final interest rate decision of the year on December 18, and it will certainly take into account the Office for Budget Responsibility’s (OBR) downgraded UK growth forecasts for the next five years.
Downgraded Growth Forecasts
The OBR has downgraded its growth forecasts, expecting the economy to grow by 1.5% over the next five years, down from a March projection of 1.8%. This downgrade was announced after the OBR accidentally leaked its report before the speech by Reeves, causing a stir on Wednesday morning.
Impact on Interest Rates
A slower economy could make a case for central bank rate cuts. However, the picture is complicated by sticky inflation projections. The OBR now predicts that the consumer price index (CPI) will end the year at 3.5% and finish 2026 at 2.5%, compared to previous expectations of 3.2% and 2.1% respectively.
Tax-to-GDP Ratio
Michael Saunders, a senior economic advisor at Oxford Economics and former Bank of England monetary policy committee rate setter, noted that the tax-to-GDP ratio will jump to 38.3% by 2030/31. This is higher than any level since the OBR began recording data in 1948/49.
Fiscal Forecast
Saunders stated that the fiscal forecast "was not as bad as feared." The tax hikes are necessary to allow for higher public spending and boost the government’s budgetary headroom. This increase in public spending is a key aspect of the government’s plan to support the economy.
Conclusion
In conclusion, the downgraded growth forecasts and sticky inflation projections create a complex picture for the Bank of England’s interest rate decision. While a slower economy could make a case for rate cuts, the higher inflation projections may lead to a different outcome. As the Bank of England prepares to make its final interest rate decision of the year, it will be closely watching the economic indicators and considering the implications of the OBR’s forecast.
