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No further stimulus, unless there is a no deal Brexit

The next Monetary Policy Committee (MPC) meeting on Thursday 17th December should be less eventful than the last one. Indeed, if our more optimistic economic forecasts are even close to being right, then the MPC may find itself twiddling its thumbs for the next few years! But the risk of a no deal Brexit means the MPC can’t relax just yet.
Thomas Pugh UK Economist
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More from UK Markets

UK Markets Chart Book

Fall in gilt yields won’t last, equities to trough sooner

Given our forecast that the Bank of England will raise interest rates from 1.25% now to a peak of 3.00%, we still think that gilt yields have further to rise. However, with attention in the markets turning towards the prospect of lower inflation and interest rate cuts further ahead as economic activity weakens, we have revised down our 10-year gilt yield forecast. We now expect the 10-year gilt yield to rise from 1.95% currently to 2.50% by the end of this year (3.00% previously), before falling to 2.25% by the end of 2023 (2.75% previously). We also think that the darkening outlook for the global economy will cause UK equity prices to fall a bit sooner. We now think the FTSE 100 will fall from about 7,400 currently to a low of around 6,700 by the end of 2022 (rather than to a low of 6,600 by the end of 2023). Bank of England Drop-In (4th August, 10:30 ET/15:30 BST): Join our post-MPC, 20-minute online briefing to find out why we think UK rates will rise by more than most expect, despite a looming recession. Register now.  

29 July 2022

UK Markets Chart Book

Gilts to struggle sooner, equities to struggle for longer

We haven’t changed our forecast that the Bank of England will raise interest rates from 1.25% now to a peak of 3.00% by the middle of next year. But we do now think that a number of other central banks will raise interest rates faster and to higher levels to try and get on top of inflation. As a result of these global factors, we now think that 10-year gilt yields will rise from 2.35% currently to a peak of 3.00% by the end of this year rather than to 3.00% by the middle of next year. We also think the FTSE 100 will fall from 7,050 now to a trough of around 6,600 by the end of next year (rather than to a low of 6,800 by the middle of next year). In other words, rises in global interest rates and the toll they will take on activity will result in the prices of gilts falling faster and UK equity prices falling further and for longer.

23 June 2022

UK Markets Outlook

Stagflation stalking the markets

If we are right in expecting inflationary pressure to stay strong even as the economy gets dangerously close to a recession, then the prices of gilts and UK equities will probably fall further over the next year. Our forecast that the Bank of England will raise interest rates from 1.00% now to 3.00% next year would take rates above the peak of 2.50% priced into the markets and would therefore suggest that 10-year gilt yields will rise further than widely expected (perhaps from 1.90% to 3.00%) and that the FTSE 100 will fall further (perhaps from 7,500 to 6,800). The risk is that an even weaker economy prompts equity prices to fall further. And with inflation high, the markets can’t rely on the Bank of England to provide any relief.

26 May 2022

More from Thomas Pugh

UK Data Response

Public Finances (May)

May’s public finances figures suggest the strong economic recovery is starting to feed through into lower government borrowing. This reinforces our view that the tax hikes and spending cuts that most fear may be avoided.

22 June 2021

UK Economics Weekly

Pay growth less inflationary than it looks, England v Scotland

The recent jump in pay growth has mainly been driven by base and compositional effects and is therefore less inflationary than it appears at first glance. That’s one reason why we think inflation will fall back below 2.0% next year and why the MPC won’t raise interest rates until 2025. Meanwhile, if economic variables are anything to go by, England may win tonight’s Euro 2020 clash with Scotland 2:1.

18 June 2021

UK Data Response

Labour Market (Apr./May)

Another strong set of labour market figures released this morning will feed concerns about labour shortages and the possible impact on inflation of higher wage growth. But the level of employment is still well below its pre-crisis level and underlying wage growth is much weaker than the headline number, suggesting there is still plenty of slack in the labour market.

15 June 2021
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