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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.
Paul Dales Chief UK Economist
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UK Economics Weekly

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.

20 May 2022

UK Data Response

Retail Sales (Apr.)

The unexpectedly strong rise in retail sales in April suggests the cost of living crisis hasn’t caused consumer spending to collapse and means the economy may have a little more momentum than we previously thought. It also supports our view that a weaker economy on its own won’t solve the issue of sky-high inflation and that the Bank of England will have to raise interest rates further from 1.00% 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.

20 May 2022

UK Economics Update

Weak confidence doesn’t make spending crash inevitable

The recent collapse in consumer confidence to a near-record low has added to the probability that the UK experiences a recession this year. But households’ large stock of savings and the tightness in the labour market means that weak confidence may not weigh on consumer spending as much as in the past.

19 May 2022

More from Paul Dales

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

UK Economics Weekly

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.

22 October 2021
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