Fiscal policy back in focus

The upward shift in investors’ interest rate expectations over the past month has been remarkable. While it is impossible to predict the timing of the first rate hike with any certainty, we have more confidence in our forecast that interest rates won’t rise as far as investors expect by the end of next year. Meanwhile, all the signs are that the Chancellor will announce some fairly stringent fiscal rules in next Wednesday’s Budget and Spending Review. That may prevent any major net giveaways being announced.
Paul Dales Chief UK Economist
Continue reading

More from UK

UK Economics Update

Labour shortages to push up wages for a bit longer

The latest data suggest that the upward pressure on wage growth from labour shortages has a bit further to run. Admittedly, the discovery of the Omicron variant has clouded the near-term outlook for wages and the labour market, with higher virus infections and/or tighter restrictions once again a possibility. Nonetheless, our base case is that most of the upward pressure on wage growth will subside from mid-2022, underpinning our view that Bank Rate won’t need to rise as far as investors currently expect.

30 November 2021

UK Economics Update

Omicron – The risks to GDP and for the BoE

The restrictions announced by the government on Saturday in response to the new Omicron COVID-19 variant increase the downside risks to our GDP forecasts and the chances that the Bank of England delays increasing interest rates until next year. And although the worse-case scenario of another lockdown in January could reduce GDP by something in the region of 3.0% m/m, the one morsel of comfort is that the economy has become more resilient to lockdowns.

29 November 2021

UK Data Response

Money & Credit (Oct.)

The rise in consumer credit in October adds to evidence that economic activity fared well at the start of Q4. But that no longer offers much comfort in light of the discovery of the new Omicron variant. While much remains uncertain, the risks to our (already subdued) GDP forecast appear to the downside.

29 November 2021

More from Paul Dales

UK Data Response

Consumer Prices (Sep.)

The dip in CPI inflation in September feels a bit like the lull before the storm as we expect inflation to jump to close to 4.0% in October and to between 4.5% and 5.0% by April next year. As such, the fall in September probably won’t deter the Bank of England from raising interest rates from 0.10% in the coming months, although we think the markets have gone too far by pricing in rates rising to 1.00% next year.

20 October 2021

UK Data Response

Labour Market (Aug./Sep.)

The further strengthening of the labour market in August may prompt some members of the Monetary Policy Committee (MPC) to put more weight on the upside risks to inflation rather than the downside risks to economic growth. As such, these data increase the chances of a rate hike in the coming months.

12 October 2021

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
↑ Back to top