Christmas parties, Omicron inflation risks, MPC’s dilemma

Some tentative evidence may already be emerging that the Omicron COVID-19 variant may have softened economic activity. It’s less clear what it means for inflation and there’s a risk that it exacerbates current price pressures. That’s why we think the Bank of England’s interest rate decision on 16th December will be a closer call than markets seem to believe. They are pricing in just a 20-30% chance of a hike from 0.10% to 0.25%.
Paul Dales Chief UK Economist
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UK Economics Weekly

Economy less favourable for whoever’s in Number 10

Although it is hard to predict whether by the end of next week Boris Johnson’s reign as Prime Minister will be solidifying or crumbling, we know that whoever is in Number 10 over the next year will have to deal with the cost of living crisis. Our forecast that inflation will rise to a little above 7% explains why we think GDP growth this year will fall short of the consensus forecast and why we think interest rates will be raised further than most expect, from 0.25% now to 1.25% by the end of the year. Drop-In (14:00 GMT, 26th Jan): UK Outlook -- More inflation, more interest rate hikes. Join our UK Economics team for a briefing on the 2022 outlook, including why we’re below consensus on growth but think the BoE will raise rates more than most expect. Register here.

21 January 2022

UK Data Response

Retail Sales (Dec.)

The fall in retail sales volumes in December was bigger than expected and supports our view that the Omicron outbreak in the run-up to Christmas may have dragged down GDP by 0.5% m/m, if not more.

21 January 2022

UK Economics Update

Real wage squeeze unlikely to be a rerun of 2008-14

The looming squeeze on real wages means that the near-term outlook for consumption and GDP has weakened. That said, we don’t expect anything as bad as the squeeze in 2008-14. In fact, real household disposable income may well recover by early 2023.

20 January 2022

More from Paul Dales

UK Economics Weekly

What if we’re wrong on inflation?

This week’s data releases have made us more confident that the Bank of England will raise interest rates in December. But our forecast that inflation will fall back sharply in 2022 underpins our view that interest rates will rise to only 0.50% in 2022 and will only reach 1.00% in 2023. That said, in an upside scenario where inflation doesn’t fall back as far as we expect, it is possible that interest rates would need to rise to 2.00% by the end of 2023. That would trigger a marked deterioration in the outlook for activity and raise the risk of a recession.

19 November 2021

UK Data Response

Labour Market (Sep./Oct.)

This labour market release is the first of two before the Bank of England’s December policy meeting and it suggests that the labour market remained tight after the furlough scheme ended. If the story is similar in the next release on 14th December, then we think the Bank will raise interest rates on 16th December.      

16 November 2021

UK Economics Weekly

Mixed messages, but BoE clear rates won’t rise far next year

It is fair to say that the Bank of England’s communications on the timing of the first interest rate hike have been muddled. But the Bank has been much clearer in its warning to the financial markets that interest rates won’t rise very far next year. We have been saying this for a while and think that interest rates will end next year at 0.50%, which is lower than priced into financial markets.

5 November 2021
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