Inflation expectations & pay growth key to policy tightening

A bumper rise in utilities prices in October could contribute to CPI inflation climbing to a 10-year high of 4.4% in November. But as we don’t expect higher CPI inflation to feed through into higher inflation expectations or faster underlying pay growth, we doubt the Bank of England will respond by tightening monetary policy until things change in 2023.  
Paul Dales Chief UK Economist
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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

More from Paul Dales

UK Data Response

Retail Sales (Jun.)

The underlying trend in retail sales volumes is a bit weaker than the 0.5% m/m rise in June suggests. And other evidence indicates that the resurgence in the virus and the “pingdemic” may have taken some oomph out of the overall economic recovery in July.

23 July 2021

UK Markets Chart Book

Markets to regain their poise as recoveries continue

While the resurgence in COVID-19 cases that has recently weighted on UK equities, the pound and 10-year gilt yields is clearly a downside risk, our view that it won’t deal a big blow to the global or domestic economic recoveries suggests that UK equities, the pound and 10-year gilt yields will all continue their latest rebound. That said, we have revised down our financial market forecasts. We no longer expect the pound to significantly strengthen or UK equities to drastically outperform overseas equities. And because we think the Bank of England will tighten monetary policy later than the financial markets assume, we now expect 10-year gilt yields to rise from close to 0.60% now to only 0.75% by the end of this year, to 1.00% next year and to 1.25% in 2023 (down from 1.25%, 1.50% and 1.50% previously).

22 July 2021

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
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