The UK economy is already feeling the effects of higher interest rates, with households experiencing a gradual squeeze and companies a rapid squeeze. The upcoming Autumn Statement will have many moving parts to consider in the OBR forecast, including higher inflation, debt service costs, and Asset Purchase Facility losses. It is undesirable for monetary policy through the APF rundown to have such strong feedback effects on fiscal policy. Excluding APF losses from fiscal rules would help avoid incentives to influence the APF rundown and make the government reluctant to approve future asset purchases when needed. The current fiscal rules do not adequately ensure long-term fiscal sustainability.

16. •
•
•
•
•
•

18. WHAT TO EXPECT IN
THE UPCOMING
AUTUMN
STATEMENT
Michael Saunders
Senior Economic Advisor
November 2023

19. UK economy already feeling effects of higher interest rates, with
more to come
19
1
2
3
4
5
6
7
8
2001 2004 2007 2010 2013 2016 2019 2022
Interest rate on stock of mortgages
Interest rate on new mortgages
Interest rate on stock of loans to companies
Interest rate on new loans to companies
Source : Oxford Economics/Haver Analytics
Gradual squeeze on households, rapid squeeze on companies
%
Since late-2021:
- Bank Rate up 515bp
- Average interest rate on stock of mortgage debt
up 115bp
- Average rate on stock of corporate debt up 410bp
0
5
10
15
20
25
30
35
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023
Manufacturing Services
Source : Oxford Economics/Haver Analytics
Share of firms reporting cost of finance is major factor constraining
investment
%

20. Many moving parts in OBR forecast
20
Effect on deficit/debt in 23/24 Effect on deficit/debt later
Higher inflation in 23/24 Lower Lower
Higher debt service costs Small Higher
Higher APF losses Higher Higher
Lower growth in 2024/25 -- Higher in 24/25, neutral 5 years
ahead
Higher inflation forecast in later
years
-- Lower (but implies weaker real
spending)
Lower potential growth forecast -- Higher

21. Undesirable link between APF rundown and
fiscal rules
21
Fiscal effects of APF rundown
• OBR likely to revise up losses on APF
gilts over 23/24-27/28 from £102bn
in March to about £170bn. Losses
will add about 1.2pp per year to
debt ratio over that period (yellow
vs red line).
• Higher losses reflects higher Bank
Rate path, lower gilt prices and
faster APF rundown.
• Total APF losses over 22/23-31/32 of
7-8% of annual GDP (£270bn).
• Strong feedback from MPC action to
fiscal policy is undesirable. Creates
incentives for HMT to influence MPC
on APF rundown. Also might make
HMT reluctant to sanction future
asset purchases in crises, even if
justified under MPC's remit.
• Better to exclude them from debt
rule.
• OBR likely to revise up losses on APF gilts over 23/24-27/28 from £102bn
in March to about £170bn. Losses will add about 1.2pp per year to debt
ratio over that period (yellow vs red line).
• Higher losses reflects higher Bank Rate path, lower gilt prices and faster
APF rundown.
• Total APF losses over 22/23-31/32 of 7-8% of annual GDP (£270bn).
• Strong feedback from MPC action to fiscal policy is undesirable. Creates
incentives for HMT to influence MPC on APF rundown. Also might make
HMT reluctant to sanction future asset purchases in crises, even if justified
under MPC's remit.
• Better to exclude them from debt rule.
82
84
86
88
90
92
94
96
98
100
2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 2027-28
OBR base case excl APF losses (March 2023)
OBR base case incl APF losses (March 2023)
OE update including extra APF losses and faster APF rundown
Source : Oxford Economics/Haver Analytics
UK: Public sector net debt ratio including and excluding losses on
APF gilts
% of GDP

22. Latest fiscal rules do not ensure fiscal sustainability
22