Interest rate rises and Covid-19 government debts

This is a preview from the Quarterly UK Economic Outlook, May 2021.

The increase in government debt will translate into an increased sensitivity of any debt service costs to interest rate changes but the level of service costs remains low.

To place interest rate rises of the order cited by the Chancellor in their economic context, we used the Institute’s NiGEM model to simulate two scenarios in which rate rises of one percentage point may take place: (1) a positive GDP shock and (ii) a negative term premia shock. No other variables are shocked, and we assume that in both cases the stock of QE each year is unchanged from the OBR baseline – a strong assumption, but one which also underpins
the OBR estimates of rising interest rate costs so is preserved here to aid comparison.

The analysis in this Box has been prepared by NIESR Principal Economist Rory Macqueen.

Please see the full analysis and its findings in the pdf document.