The fiscal winds change, higher rates on the horizon

Philip “the fiscal hawk” Hammond was surprisingly generous in the Budget on Monday, spending his entire windfall from the downward revision to the OBR’s borrowing forecast. This means that rather than acting as a small headwind on growth next year, fiscal policy will turn into a small tailwind. As a result, we have revised up our GDP forecasts slightly for 2019 and 2020. However, given that the economy is already operating at close to full capacity we think that the fiscal stimulus will also push up on inflation, causing the Bank of England to raise interest rates by even more than we had previously expected, once the Brexit fog has cleared.