UK

UK Economics Weekly

Closer to lift-off, but rates not going to the moon

We still think it is more likely that the first hike in interest rates will come next year rather than this year. But irrespective of when it happens, the key point is that the subsequent pace of monetary tightening is likely to be more gradual and slower than is currently priced into the financial markets.

15 October 2021

UK Data Response

GDP & International Trade (Aug.)

The 0.4% m/m rise in GDP in August confirms that the rapid gains in output, which in just 16 months lifted GDP from being 25.1% below its February 2020 pre-pandemic peak to 0.8% below, are now behind us. And shortages, including the petrol/energy crisis, may prevent GDP from rising much in the coming months. This weaker activity outlook may prevent the Bank of England from hiking interest rates this year.

13 October 2021

UK Economics Update

Labour shortages becoming worse and more widespread

Labour shortages seem to be worse and more widespread than we had expected. Although the end of the furlough scheme in late September may ease some of the shortages, we doubt it will plug all the holes. As such, we now think labour shortages are unlikely to ease significantly until at least the middle of next year. That adds to the downside risks to our GDP forecast and the upside risks to our inflation forecast.

12 October 2021

Key Forecasts

Main Economic & Market Forecasts*

%q/q(%y/y) unless stated

Latest

Q3 2021

Q4 2021

Q1 2022

Q2 2022

Q3 2022

Q4 2022

2021

2022

2023

GDP

+5.5(+23.6)

+1.5(+6.8)

+0.4(+6.1)

+1.0(+8.6)

+1.0(+4.0)

+0.9(+3.3)

+0.9(+3.8)

(+6.9)

(+4.8)

(+3.2)

CPI Inflation (%)

(+3.2) (Aug.)

(+2.9)

(+4.5)

(+4.4)

(+4.2)

(+3.1)

(+2.1)

(+2.5)

(+3.4)

(+1.9)

ILO Unemployment Rate (%)

4.5 (Aug.)

4.5

4.9

5.1

4.9

4.5

4.2

4.7

4.7

4.0

Bank Rate, end period (%)

0.10

0.10

0.10

0.10

0.25

0.25

0.25

0.10

0.25

0.50

BoE QE Target, end per. (£bn)

895

895

895

895

895

895

895

895

895

860

10-year Gilt, end period (%)

1.07

0.91

1.00

1.06

1.13

1.19

1.25

1.00

1.25

1.50

$/£, end period

1.37

1.37

1.35

1.35

1.35

1.35

1.35

1.35

1.35

1.40

Euro/£, end period

1.18

1.17

1.17

1.17

1.17

1.17

1.17

1.17

1.17

1.17

Sources: Capital Economics, Refinitiv


Closer to lift-off, but rates not going to the moon

UK Economics Weekly

17 October 2021

Our view

Broadening product and labour shortages in the UK mean that the upside risks to inflation and the downsides risks to economic activity are greater than in most other economies. We think CPI inflation will rise from 3.2% in August to a peak of just above 4.7% around the turn of the year and that the economy will hardly grow at all in the coming months. The rise in some measures of inflation expectations mean that the Bank of England will probably raise interest rates in 2022. But we suspect that the weakening activity outlook will prompt the Bank to raise rates a bit later and slower than the increases from 0.10% to 0.75% priced into the financial markets for next year.

Latest Research

UK Data Response

Labour Market (Aug./Sep.)

12 October 2021

UK Economics Weekly

Economy running on fumes

1 October 2021

UK Economics Update

Farewell furlough

30 September 2021

UK Data Response

GDP (Q2 Final)

30 September 2021
See All →

Latest Outlook

UK Economic Outlook

Surge in inflation won’t be sustained

Our forecast that COVID-19 won’t significantly reduce potential supply means that the economy can run a bit hotter for longer without generating the persistent rise in inflation that would require monetary policy to be tightened. Admittedly, this won’t prevent the previous gains in commodity prices and component costs from triggering a rise in CPI inflation from 2.5% in June to around 4.0% by the end of the year. But it should mean that CPI inflation falls back below 2.0% in 2022 and the short-lived spike doesn’t lead to higher pay growth and inflation expectations. That’s why we think monetary policy won’t be tightened until the middle of 2023, which would be a year later than the markets expect.

20 July 2021