High UK inflation won’t help public finances: OBR’s Hughes

LONDON, July 14 (Reuters) – High inflation will not help Britain’s public finances in the same way as it has in the past because government debt is now more sensitive to changes in interest rates and prices, the UK government said on Friday. President of the Office of Budgetary Responsibility. .

Richard Hughes told the BBC that the old notions of being able to inflate high levels of public debt no longer apply.

The average effective maturity of British government debt has fallen from around seven years in 2008 to two years, Hughes said, meaning higher interest rates now feed the cost of government debt faster than in the past. past.

This is largely due to the Bank of England’s quantitative easing program through which it effectively replaced longer-term government bonds with very short-term central bank reserves, linked directly to the BoE bank rate.

Second, around a quarter of Britain’s government bond shares are linked to inflation, by far the highest ratio among major advanced economies, so investors are increasingly being compensated by the state. as consumer prices rise.

“What that means is that increases in inflation don’t really help our country’s public finances like they used to,” said Hughes, president of the OBR.

“So higher interest rates, higher inflation, hit public finances much faster and it means that we start to feel the burden of the interest rate going much higher immediately.”

Britain had the highest rate of consumer price inflation among the major advanced economies in June, at 8.7%.

“What we’re seeing more recently is inflationary pressures becoming more and more entrenched in the economy,” Hughes said.

British inflation reached all-time highs in the mid-1970s and remained high for much of the 1980s. The main measure of net public sector debt as a percentage of economic output fell during that time from around 49 % to 22% in the early 1990s.

Reporting by Andy Bruce; edited by William James and David Milliken

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