Rates heading to 3.0% as MPC focuses on inflation concerns
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Rates heading to 3.0% as MPC focuses on inflation concerns

The weakening economic outlook has deepened the dilemma facing the Monetary Policy Committee (MPC). But we think the MPC is sufficiently worried about rising price/wage expectations to raise Bank Rate from 0.75% to 1.00% on Thursday 5th May and to start shrinking the balance sheet quicker by selling gilts. Based on our forecast that the labour market will be tighter and that wage/price expectations will be more persistent, we expect the MPC to hike rates to 3.00% in 2023. That’s above the peak priced into the markets (2.50%) and the peak expected by a consensus of economists (2.00%). UK Drop-In (Thurs. 5th May, 15:30 BST): Paul Dales and Ruth Gregory will be discussing our UK Economic Outlook, including our above-consensus call for UK interest rates, in a 20-minute online briefing after the May MPC meeting. Register now
Ruth Gregory Senior UK Economist
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More from UK Markets

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

UK Markets Chart Book

Markets too sanguine on interest rates

Our new forecasts that inflation will stay higher for longer and that the labour market will remain tight into 2023 suggests that Bank Rate will rise to a peak of 3.00% next year rather than the peak of 2.50% currently priced into the markets. As a result, we have revised up our forecasts for gilt yields. We now think the 10-year yield will rise from 1.84% to 3.00% by the middle of 2023. And in response to the prospect of weaker economic growth and higher interest rates, we have revised down our equity price forecasts. We expect the FTSE 100 to fall from 7,550 now to around 7,250 by the end of this year. Finally, this negative shift in investor sentiment partly explains why we have revised down our forecasts for the pound. We think the pound will weaken from $1.26 now to around $1.22 by December. UK Drop-In (Thurs. 5th May, 15:30 BST): Paul Dales and Ruth Gregory will be discussing our UK Economic Outlook, including our above-consensus call for UK interest rates, in a 20-minute online briefing after the May MPC meeting. Register now

29 April 2022

More from Ruth Gregory

UK Economics Weekly

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.

22 April 2022

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
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