New BoE and gilt yield forecasts

This week’s signs that two members of the Monetary Policy Committee have become more worried about the upside risks to inflation have led us to bring forward our forecast of when policy will be tightened from February 2024 to August 2023. That’s still some way off and is 12 months later than the financial markets expect. Because of that, we have also revised down our forecast for 10-year gilt yields.
Paul Dales Chief UK Economist
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UK Economics Weekly

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%.

3 December 2021

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

More from Paul Dales

UK Data Response

Consumer Prices (Jun.)

The rise in CPI inflation from 2.1% in May to 2.5% in June was smaller than the leap in US inflation to 5.4% released yesterday, but we think the gap between the two will shrink as inflation in the UK climbs to around 4.0% by the end of the year. That said, as we suspect that the spike in UK inflation will be short-lived, we don’t expect the Bank of England to tighten policy anytime soon.

14 July 2021

UK Economics Weekly

No need to fear as furlough enters final furlong

We think that concerns about the winding up of the furlough scheme are overdone for two reasons. First, at the end of May only 2.3m people were on furlough and half of them were working at least some hours. Second, by the time the scheme closes at the end of September, we think GDP will have risen back to its pre-pandemic peak. That means the economy can support a level of employment similar to the current level. As such, the furlough will probably go down in history as the scheme that averted a bloodbath in the labour market.

2 July 2021

UK Economics Weekly

Inflation fears, Euro 2020 hopes

The mounting evidence that price pressures are rising is a threat to our forecast that CPI inflation won’t spend a long time above the 2% target until late in 2023. The good news, though, is that if inflation were more important than goals in the Euro 2020 football tournament, then at least one of England or Scotland would make it into the knockout stages.

11 June 2021
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