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Weak economy won’t prevent further bond market sell-off

The downbeat news on the UK economy this week did not stop the 10-year gilt yield rising further to its highest level since November 2015. And with CPI inflation set to climb further, perhaps to a peak of close to 10.0%, and the Bank of England growing more concerned that price expectations could become the-anchored from the 2% inflation target, it is becoming increasingly plausible that interest rates will rise further than the peak of 2.00% forecast by the consensus and the 2.75% peak priced into the financial markets. That suggests gilt yields may be some way from their peak yet.
Ruth Gregory Senior UK Economist
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UK Data Response

Consumer Prices (Jul.)

The encouraging evidence that the upward pressure on underlying inflation from global factors has started to ease will be of little comfort to the Bank of England given the signs that this is being replaced by more persistent domestic inflationary pressures. This increases the chances that the Bank of England will opt for a 50 basis point (bps) interest rate hike on 15th September, rather than 25bps.

17 August 2022

UK Data Response

Labour Market (Jun/Jul.)

June’s labour market figures revealed further evidence that the weaker economy is leading to a slightly less tight labour market. That said, by any metric the labour market is still exceptionally tight. And the robust rise in employment in June together with the leap in earnings growth will heap pressure on the Bank of England to raise interest rates by 50 basis points rather than 25 basis points at the next policy meeting on 15th September.

16 August 2022

UK Economics Weekly

Risk of a bigger and longer-lasting squeeze on real incomes

The prospect of a bigger rise in utility prices in October and in the first half of 2023 means the risks to our forecast for CPI inflation to rise from June's 40-year high of 9.4% to a peak of 12.5% in October are skewed to the upside. This increases the risk of a bigger and longer-lasting squeeze on households' real incomes and supports our view that consumer spending will be at the epicentre of a recession in 2022/23.  

12 August 2022

More from Ruth Gregory

UK Data Response

Consumer Prices (Mar.)

The rise in CPI inflation in March from 6.2% to a new 30-year high of 7.0% was the sixth upside surprise in as many months and will pile more pressure on the Bank of England to raise interest rates rapidly. We think rates will rise from 0.75% to 1.00% on 5th May and to at least 2.00% next year.

13 April 2022

UK Data Response

Labour Market (Feb./Mar.)

The latest batch of data brought some signs of a softening in labour demand, but with the unemployment rate having fallen to pre-COVID levels, job vacancies at a record high and wage growth rising, the labour market is very tight. So, even though real wages are now falling and will decline further, we still expect the Bank of England to raise interest rates from 0.75% to 1.00% on 5th May and to 2.00% next year.

12 April 2022

UK Data Response

GDP & International Trade (Feb.)

The news that the economy was hardly growing at all in February suggests the economy had a little less momentum in Q1 than we had previously thought, and increases the risk of a contraction in GDP in the coming months as the squeeze on household real incomes intensifies.

11 April 2022
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