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Boost for George Osborne as OECD upgrades growth forecasts for recovering UK economy

Think-tank fires warning shot on impact of Help to Buy scheme in setting off house price inflation amid fears of a bubble

Russell Lynch
Tuesday 19 November 2013 11:16 GMT
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A leading think-tank has fired a warning shot on impact of Help to Buy scheme in setting off house price inflation amid fears of a bubble
A leading think-tank has fired a warning shot on impact of Help to Buy scheme in setting off house price inflation amid fears of a bubble

The Chancellor George Osborne was bolstered today as a leading think-tank upgraded its growth forecasts for a recovering UK economy and backed his efforts to tackle the deficit.

The Paris-based Organisation for Economic Co-operation and Development’s latest Economic Outlook report ratcheted up estimates for UK growth to 1.4 per cent this year and 2.4 per cent next year, significantly higher than its 0.8 per cent and 1.5 per cent forecasts in the June outlook.

The body said it was “important to maintain existing consolidation plans to restore fiscal sustainability” and in a further fillip to the Chancellor, added that interest rates could stay at their current record low of 0.5 per cent until the end of 2015 with inflation set to fall back gradually over the next two years. It predicts unemployment hitting the Bank of England’s 7 per cent threshold for considering rate rises by the end of 2015.

The OECD said UK activity had “picked up and broadened” thanks to a turnaround in private sector confidence, monetary stimulus from the Bank of England and a housing market roaring ahead in the wake of the Government’s Help to Buy initiative. The IMF also raised its forecasts in October. The improvement comes against the backdrop of a slowdown in emerging market growth which prompted the OECD to cut its forecast for global growth this year to 2.7per cent.

The think-tank, however, fired a warning shot on the impact of the Help to Buy scheme in setting off house price inflation amid fears of a bubble. “Despite recent progress in reforming the planning system, it is urgent to continue to relax the barriers to housing supply to prevent overheating in the property markets,” the report said.

It warned: “Vigorous house price increases could boost wealth and private consumption, but could also undermine affordability and stretch the balance sheet of first-time buyers.”

The OECD broadly backed the Bank’s forward guidance regime, which drew fire last week when Threadneedle Street’s latest forecasts suggested possible rate rises could come onto the agenda as soon as the end of next year.

“While forward guidance provides assurance that monetary policy will not choke off the recovery with premature policy hikes, risks of rising medium-term inflation need to be closely monitored as the extent of slack in the economy might be less than expected.”

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