Forecast Release

Although the Chancellor did not say in so many words precisely what lay behind his thinking on the Budget, the implicit message was clear. His aim was to rebalance fiscal and monetary policy, tightening the former so that the monetary relaxation that we have already had does not have to be quickly reversed. In so doing, he has increased the chances that interest rates can stay lower for longer than would have been the case if he had not acted on the PSBR. The reaction of the foreign exchanges critical but again the Budget makes it more likely that the devaluation of the pound since last September can be made one off, not the precursor to a prolonged downward float. This is a necessary condition for a 'successful' devaluation, but it is not sufficient: the wage response is also critical. High unemployment is helpful in this respect, though it has not stopped us frittering away the benefits of previous devaluations. Our February forecast was pessimistic on the UK's ability to hold onto the competitive advantage that devaluation brings; the Budget, while short on monetary underpinning, increases the odds in favour of a more optimistic outturn.