The Chancellor acknowledged in his Budget speech that the UK rate of inflation is likely to stay above government targets for at least the next 18 months, raising the likelihood of interest rate rises later this year.
Citing figures from the Office for Budget Responsibility, Osborne said he expected inflation to be “between 4% and 5%” this year, falling to 2.5% in 2012 and back to 2% “in two years time”. The government’s target figure is 2%.
The fact that the figure is well above target will put pressure on the Bank of England policy committee to raise interest rates to bring it under control. Most analysts were expecting the first rate rise to be in May but the recent earthquake and tsunami devastation in Japan has slowed global economic growth. As a result, markets are now factoring in a rate in August.
The Chancellor said UK economic growth in this year is now forecast to be around 1.7%, which is below the 2.0% predicted last autumn. However, it is expected to rise to 2.5% in 2012 and peak at 2.9% in 2013 and 2014.
Government borrowing is likely to be £146bn this year which is less than forecast (but not quite by as much as had been hoped) and is likely to be £122bn in 2012. It is forecast to fall to £29bn by 2015, by which time the total borrowing will be 69% of GDP.
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