INTEREST rates may have peaked earlier than expected and inflation in Jersey is set to fall ‘steadily’ this year, a panel of independent economic advisers have told the Treasury Minister.
The updated modelling from the Fiscal Policy Panel will bring some relief to struggling households facing the highest rise in the cost of living since the 1980s and the end of the era of low Bank of England base rates which have seen dramatic increases in mortgage repayments.
But although inflation is set to drop from a peak of 12.8% in the first quarter of this year, the rate is expected to remain ‘elevated’, averaging 9.9% for 2023.
In its update, the FPP said that despite global uncertainty, Jersey’s economy was operating ‘above capacity’, as data suggested a ‘growing economy but a tight labour market’.
It cites an 11% growth in house prices in 2022, low unemployment, a 6.2% rise in average earnings in the 12 months to June last year and ‘positive future and current business activity’ reported last year in the Business Tendency Survey completed by company bosses.
The report says that ‘as such, growth is expected to continue into 2023’ but with non-finance firms facing the greater pressures.
Although homeowners will welcome news that interest rates may have plateaued, the earlier peak is expected to result in slower growth in the finance sector, where higher rates drive greater profits.
‘Profits in the financial sector are now expected to have grown faster in 2022 with slower but still high growth in 2023,’ the report states.
‘As such, the panel has revised its forecast for real GVA [a measure of economic productivity] growth in 2022 from 2.5% to 3.4%, and from 5.9% to 3.9% in 2023.’
The other key points in the updated forecast are:
Slightly higher employment growth.
Slightly higher average earnings growth in 2023, before returning to below trend in the later years of the forecast period.
A slowdown in the housing market – in terms of prices and the number of transactions, as the effect of higher interest rates on mortgage costs feeds through.
Given the revisions to the economic forecasts following the publication of the States of Jersey 2022 Annual Report and Accounts, the panel said it was ‘likely that tax receipts will be higher than previously forecast with the fiscal position aiming to generate significant surpluses’.
The panel, chaired by Dame Kate Barker, who sits alongside Francis Breedon and Richard Davies, said the government should use the extra funds to pay off debt and boost reserves.
‘The panel recommends surpluses are used to reduce outstanding short-term borrowing. When considering long-term borrowing, the key factors to be considered will include the likely cost of new borrowing, as compared with the projected returns on Jersey’s investments.
‘The latter are, of course, highly uncertain in the short-term – but may be somewhat more predictable over longer periods.
‘As we have commented before, any borrowing proposals should be assessed carefully against the aims and objectives set out in the government’s debt framework and strategy.
‘So, we would reiterate our view that the government should build its reserves by transferring any surpluses, after the repayment of short-term borrowing, to the Stabilisation Fund and Strategic Reserve.’