by Rachel Reeves’ plan to significantly increase borrowing in the Budget risks putting pressure on mortgage rates, according to Treasury analysis.
An official modeling exercise shows that the Chancellor’s plans to rewrite Britain’s fiscal rules could increase the cost of debt for consumers and businesses.
A Treasury research paper warns that a “fiscal release” of just one per cent of GDP could lead to a “peak increase in interest rates” of up to 1.25 percentage points.
The document also warns that for every £25 billion increase in annual borrowing, interest rates could increase by between 0.5 and 1.25 percentage points.
Ms Reeves is widely expected to use her October 30 Budget to ease lending rules, a move that could unlock up to £50 billion of spending.
Treasury sources confirmed that the policy paper, published in December and entitled “The impact of borrowing on interest rates”, reflects the Department’s current thinking.
It comes just as mortgage rates were starting to cool, with some deals falling below 4 percent for the time in months.
Core interest rates currently stand at 5 per cent, but a rise to 6.25 per cent would add around £200 a month to a typical mortgage.
Jeremy Hunt, the former chancellor, said on Saturday night: “The consistent advice I have always received from Treasury officials has been that increased borrowing will mean higher interest rates for longer – and that households would be mortgaged.
“It would be a hammer blow and result in mortgage misery for many people at the moment the Bank of England is expected to cut interest rates.”
Mr Hunt called for the Office for Budget Responsibility to be legally obliged to publish a full analysis of any changes to the fiscal rules. Britain’s debt recently rose to 100 percent of gross domestic product for the first time since the 1960s.
Despite this, Ms Reeves on Saturday dropped her strongest hint yet of her intention to increase borrowing to fund a multi-billion pound capital programme, vowing to “invest, invest, invest”.
It comes after Sir Keir Starmer warned that his party’s first Budget is “going to be painful”, and the chancellor is expected to raise some taxes in an effort to plug a £22 billion black hole she says find in the community to fill. finance.
It is thought that this could involve a raid on capital gains tax, inheritance tax or tax on pensions.
Economists said some of the effects of higher borrowing had already been “priced in”. The yield on 10-year gilt was at 4.13 per cent when markets closed on Friday, the highest since late July, partly reflecting concerns that Ms Reeves plans to increase borrowing in the Budget.
However, the Institute for Fiscal Studies (IFS) also warned that Ms Reeves’ “opportunistic” attempt to fiddle with Britain’s fiscal rules risks a rise in interest rates.
The think tank has said that any move to change the Chancellor’s self-imposed fiscal rules would not be “without risks” and that borrowing an extra £50 billion in 2028-29 could have a “material impact on interest rates”.
Carl Emmerson, deputy director of the IFS, said: “If you borrow a lot of money, you run a greater risk of higher interest rates in response. One lesson for Rachel Reeves is to be careful when it comes to getting loans because there is a risk to interest rates.
“Some will have savings and will experience higher interest rates on their savings. The main risk you would worry about is that people’s mortgages would be a bit more expensive.”
Mr Emmerson also said the impact on mortgages would depend on whether the additional loan was used to fund “current” or “capital” expenditure.
“If you put money into an economy, there is more money going around which can cause inflation and the Bank of England will respond with higher interest rates. This would happen if they saw a presented Budget which they felt would not be beneficial to the supply side of the economy,” he said.
“But if you make some investments that maybe encourage the private sector to invest, improve the growth rate and increase the productive capacity of the economy, you won’t worry about the Bank of England that there is inflation and that interest rates are higher height involved. required.”
The Treasury’s analysis excludes measures that have “supply-side benefits” and notes that the impact on interest rates would be less “where those policies have a material supply-side benefit”.
Official Treasury advice warns that “an unexpected increase in spending, or a reduction in taxation, financed by additional government borrowing, will increase the level of demand in the economy, increasing inflationary pressures, potentially leading to inflation on him. focus on increased central bank interest rates”.
A Treasury spokesman said: “This analysis shows that the relationship between fiscal plans, inflation and interest rates is complex and can change significantly over time. The Chancellor has repeatedly said that she will not play fast and loose with the public finances and that she will protect working people.”
