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.
Paul Dales Chief UK Economist
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UK Economics Weekly

Closer to lift-off, but rates not going to the moon

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15 October 2021

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The 0.4% m/m rise in GDP in August confirms that the rapid gains in output, which in just 16 months lifted GDP from being 25.1% below its February 2020 pre-pandemic peak to 0.8% below, are now behind us. And shortages, including the petrol/energy crisis, may prevent GDP from rising much in the coming months. This weaker activity outlook may prevent the Bank of England from hiking interest rates this year.

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Worrying more about higher inflation

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21 September 2021

UK Data Response

Consumer Prices (Aug.)

The leap in CPI inflation from 2.0% in July to a nine-year high of 3.2% in August (consensus 2.9%, CE 3.1%) is the first step in a rise that may take inflation to 4.5% or above by November. But as inflation will fall back almost as sharply next year, we don’t think the MPC will raise interest rates until mid-2023.

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The economy is entering a more challenging phase of its recovery from the pandemic as it is having to deal with another rise in COVID-19 cases and both product and labour shortages. We think the recovery will continue, but it will be harder going than over the past six months and will come alongside a period of higher inflation.

10 September 2021
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