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Inflation to rise further and linger longer than in the US and EZ

Not only did the surge in CPI inflation to 9.0% in April leave inflation in the UK above the rates in both the US and the euro-zone, but inflation in the UK will probably rise further and stay higher for longer. That feeds into our forecast that the Bank of England will have to raise rates further than it expects, from 1.00% now to 3.00%. ECB Drop-In (24th May 10:00 ET/15:00 BST): Could the ECB deliver a hawkish surprise? Join economists from our Europe and Markets teams for a discussion about what to expect from the Bank’s tightening cycle, including the chances for a bumper hike in July or even an early move at next month’s meeting. Register now.
Ruth Gregory Senior UK Economist
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UK Economics Weekly

Fall in confidence not enough to rule out aggressive rate hikes

Signs that business confidence has started to ease may provide the Monetary Policy Committee with some reassurance that firms' pricing power will soon soften. But the danger that bigger increases in wages will further add to businesses' costs, forcing them to raise their prices by even more, suggests that the Bank may need stronger proof that pricing power is waning before ruling out the need for more aggressive rate rises. We expect interest rates to rise from 1.25% to 3.00%. And for as long as evidence of increased pricing power exists, the risk of even higher rates will linger.

1 July 2022

UK Data Response

Money & Credit (May)

The more muted rise in unsecured borrowing in May suggests the cost of living crisis and recent plunge in consumer confidence are prompting households to exercise a bit more caution. That adds to reasons to think consumer spending is struggling and that the economy will be very weak over the coming months.

1 July 2022

UK Data Response

GDP (Q1 Final)

The final Q1 GDP data leave households looking a bit more vulnerable to the big fall in real incomes that’s going to hit in Q2 and Q3. Although GDP and consumer spending won’t fall as far as real incomes, it’s pretty clear that the economy is going to be very weak for a while. A recession is a real risk.

30 June 2022

More from Ruth Gregory

UK Economics Update

Can the economy handle interest rates of 3%?

We estimate that a rise in Bank Rate from 0.10% last November to a peak of 3.00% would mean that GDP is around 2.0% lower than if Bank Rate had stayed at 0.10%. That is a smaller drag than the Bank of England has incorporated into its forecasts. We do not expect this to generate a recession, but the risk is very real. The danger is that rising interest rates and falling house prices prompt a negative feedback loop that results in a bigger hit to GDP than we expect.

17 May 2022

UK Economics Weekly

Weakening economy won’t do the MPC’s job

The Bank of England’s prediction that the economy is on the brink of recession grabbed the headlines this week, but we suspect its GDP forecast will prove too downbeat. That’s not to say the risk of recession isn't real. But the bigger point of difference is that while the Bank expects the weaker economy to solve the issue of soaring inflation, we think it will require interest rates rising further than most people expect, to 3.00% next year. UK Housing Drop-In (10th May 10:00 BST/17:00 SGT): Economists from our property team are hosting a 20-minute briefing to explain why we think UK house prices are heading for a fall – and how bad the fallout will be. Register now.

6 May 2022

BoE Watch

Rates heading to 3.0% as MPC focuses on inflation concerns

The weakening economic outlook has deepened the dilemma facing the Monetary Policy Committee (MPC). But we think the MPC is sufficiently worried about rising price/wage expectations to raise Bank Rate from 0.75% to 1.00% on Thursday 5th May and to start shrinking the balance sheet quicker by selling gilts. Based on our forecast that the labour market will be tighter and that wage/price expectations will be more persistent, we expect the MPC to hike rates to 3.00% in 2023. That’s above the peak priced into the markets (2.50%) and the peak expected by a consensus of economists (2.00%). UK Drop-In (Thurs. 5th May, 15:30 BST): Paul Dales and Ruth Gregory will be discussing our UK Economic Outlook, including our above-consensus call for UK interest rates, in a 20-minute online briefing after the May MPC meeting. Register now

28 April 2022
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