U.K. Interest Rates Would Increase More Under Labour, Niesr SaysTom Beardsworth
How you vote in the general election in three months could determine the cost of your mortgage.
Analysis by the National Institute of Economic and Social Research of the three main political parties’ implied fiscal plans shows interest rates would rise marginally faster over the next four years under Labour and the Liberal Democrats than if Prime Minister David Cameron’s Conservatives form the next government.
That’s because the slower pace of deficit reduction envisaged by Labour and the Liberal Democrats would stimulate faster economic growth and employment, prompting the Bank of England to raise rates sooner, London-based Niesr predicts.
Under Labour or the Liberal Democrats, rates would be 70 basis-points higher by 2019 relative to what they would be under the plans of the current Conservative-Liberal Democrat coalition, Niesr said. A Conservative-only government would lead to rates being 30 basis points higher, it said.
The Bank of England kept the benchmark rate at a record-low 0.5 percent this month. Slowing inflation has prompted traders to push out bets on timing of the first rate increase, with Sonia forward contracts now ruling out a move before next year.
Niesr forecasts that U.K. economic growth will accelerate to 0.8 percent this quarter and 0.9 percent in the second as falling oil prices spur consumer spending, providing a boost for Cameron as he seeks re-election on May 7. A 0.9 percent rate would be the fastest growth since the second quarter of 2010, when he became prime minister. The unemployment rate will drop to 5.2 percent by the end of 2015.
BOE Governor Mark Carney will publish the central bank’s new economic forecasts and its outlook for inflation, at a press conference in London on Thursday.
Lower inflation, forecast by Niesr to average 0.5 percent this year, is unlikely to depress wage growth, according to the institute. There is a “relatively low” risk of inflation expectations becoming dislodged, it said.