The Chancellor didn’t just do a further U-turn on the Truss/Kwarteng policies in his statement today, he essentially wiped them out in an attempt to reassure the financial markets that the government does have some fiscal discipline after all. It seems to be working, with most of the rise in the pound and the large fall in gilt yields earlier today having being sustained. But while the Chancellor has reduced fiscal uncertainty, by guaranteeing that utility prices will be frozen only until April 2023 rather than October 2024, he has introduced more economic uncertainty. It is possible this means that inflation will be higher than otherwise for longer, that households’ real incomes will fall by more and that the recession will be deeper. There are a lot of moving parts, but our existing forecasts that interest rates will rise from 2.25% now to 5.00% and that GDP will fall by 2% during a recession don’t seem that wide of the mark.
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