Spring Budget: Boost to supply side of economy with further tightening for BoE to consider

‘In theory, today’s Budget argues for a bit more tightening by the Bank of England (BoE) at next week’s meeting. Further support for businesses and households around energy prices, more defence spending and tax breaks for business investment will boost demand this year. However, the Monetary Policy Committee (MPC) is unlikely to be too concerned about the inflationary impact of these commitments. Lower energy bills will help headline inflation fall and extra defence spending is unlikely to boost demand in the broader economy.

‘By far the biggest issue at next week’s MPC meeting will be inflation vs financial stability. We had already thought the chances of a rate hike next week were probably at 50%, but the flare up of risks around Credit Suisse today and associated moves in financial market makes that probability even smaller. It now looks like the MPC will press pause on meeting earlier than we previously expected.

‘In the medium term, the measures announced today should boost the supply side of the economy. Getting more inactive people back into work will be crucial to bringing down wage growth, and by association services inflation, and reducing the need for further rate hikes. And any boost to business investment should improve productivity and reduce inflationary pressures.

‘The risk is that with a razor thin margin against his headroom, any underperformance against the OBR forecasts means the chancellor will have to row back on some of these measures in the next Budget.’

Thomas Pugh, economist at RSM UK