CPI inflation may peak around 4%

Bigger rises in commodity and component costs than we had expected mean that we now think CPI inflation will rise from 2.1% in May to a peak of about 4.0% around the turn of the year. But we still think this will be a short, sharp spike in inflation that won’t feed into persistently faster pay growth or higher inflation expectations for a couple of years yet. As such, we suspect the Monetary Policy Committee will look through it and won’t tighten policy as soon mid-2022 as the financial markets expect.
Paul Dales Chief UK Economist
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UK Economics Weekly

Why we changed our mind on the BoE

There were two key reasons behind our decision to forecast that the Bank of England will first raise interest rates in 2022 rather than in 2023. First, there is more evidence that the rise in inflation is feeding into faster underlying wage growth and higher inflation expectations. Second, the Bank’s reaction function appears to have changed as it seems less willing to look through a temporary rise in inflation. That said, we still think that the Bank will raise interest rates a little later than the February 2022 date priced into the market and to a lower level by the end of 2024 than investors expect.

24 September 2021

UK Economics Update

MPC getting closer to tightening policy

While rates were left at +0.10% in an 9-0 vote and the Bank of England’s target stock of purchased assets at £895bn, today’s Monetary Policy Committee (MPC) policy statement suggests that the Bank is moving closer to raising interest rates. As such, we now think that rates could rise in early 2022, rather than in 2023 as we had previously thought.

23 September 2021

UK Data Response

IHS Markit/CIPS Flash PMIs (Sep.)

The small fall in the composite activity PMI in September indicates that the economy lost a little more momentum. But at the same time, there were clear signs that price pressures have continued to pick up. While it is difficult to know which the Bank of England will choose to put more weight on, our view is that the Monetary Policy Committee (MPC) won’t rush to raise interest rates.

23 September 2021

More from Paul Dales

UK Data Response

GDP (Q1 Final)

The small downward revision to Q1 GDP growth probably won’t stop the economy from rising back to its pre-pandemic peak in the coming months. And the larger-than-expected rebound in the household saving rate increases the potential for faster rises in GDP further ahead.

30 June 2021

UK Economics Update

Recovery evolving rather than stalling

The recent softening in some indicators of activity is probably mostly a result of shifts in spending patterns within the economy rather than a sign that the recovery has already stalled. As such, we still expect monthly GDP to rise back to its pre-pandemic level by the autumn.

29 June 2021

UK Economics Update

MPC more optimistic, but no more hawkish

Other than the Monetary Policy Committee noting the growing upside risks to inflation alongside today’s policy decision, there were no real signs that it is thinking about tightening policy sooner, à la the Fed. We think policy will be tightened much later than the mid-2022 date the markets have assumed. We are hosting a Drop-In at 1400 BST/0900 ET on Thursday 24th June shortly after the MPC meeting to discuss if the Bank of England will soon follow the Fed by signalling a willingness to bring forward the withdrawal of policy support. You can register here.

24 June 2021
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