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UK Economics Weekly

UK Economics Weekly

Too soon to conclude inflation won’t become more persistent

It’s too soon to conclude that the weak tone of this week’s news on activity means that inflation won’t become more persistent. Our proprietary measure of underlying/persistent CPI inflation rose to a new record high in May. And the flurry of higher pay settlements across the economy suggests that high inflation is feeding into faster wage growth. This may not necessarily be enough to prompt the Bank of England to start raising interest rates in 50 basis point steps. But we still think that rates will need to rise from 1.25% to 3.00% to tame inflation.

24 June 2022

UK Economics Weekly

Why didn’t the BoE go further and what next?

In some ways, given its concerns about the weakening in the real economy, the Bank of England's decision not to follow the Fed and raise rates by more than 25 basis points makes sense. But with more persistent underlying price pressures likely to keep core inflation in the UK above the rate in the US until mid-2023 and growing evidence that firms' price and wage expectations have become dislodged from the 2.0% target, we wouldn’t rule out the Bank raising rates by 50bps at future meetings. Either way, we still think rates will need to rise to 3.00%, rather than to the peak of 2.00% expected by the consensus. Markets Drop-In (22nd June, 10:00 ET/15:00 BST): Join our Markets team for this special briefing on the outlook for equities, bonds and FX and a discussion about revisions to our forecasts. Register now

17 June 2022

UK Economics Weekly

Boris using the economy to fight back, BoE to hike by 50bps

By deploying economic policies and Brexit battles in the fight for his political life, Boris Johnson is inadvertently asking the Bank of England to work harder to quash inflation. As it happens, we think the Bank of England may join other central banks in hiking interest rates by 50 basis points, from 1.00% to 1.50%, at next Thursday’s meeting. In contrast, the markets are pricing in only a 25% chance of a 50 basis point hike and no other analysts are forecasting 50 basis points. BoE Preview Drop-In (14th June, 10:00 ET/15:00 BST): Just ahead of the June MPC decision, we’ll explain in this 20-minute briefing why we’re even more convinced that UK rates will peak at an above-consensus 3% next year. Register now.

10 June 2022
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UK Economics Weekly

Risks to consumer spending forecast tilted to the downside

April's money and credit data provide another reason to think that the consumer slowdown in April wasn't too severe. But it may take time for the cost of living squeeze to fully filter through into weakness in consumer spending. And the signs that inflation may rise a bit further and households may not cut their savings as far as we expect suggests the risks to our forecast for consumer spending to contract by 0.2% q/q and flatline in Q3 are tilted to the downside. We are sending this Weekly two days earlier than usual because Capital Economics’ London office is closed on 2nd – 3rd June for the Queen’s Platinum Jubilee celebrations.

UK Economics Weekly

What the Chancellor gives, the BoE will have to take away

The new fiscal stimulus announced by the Chancellor this week puts more pressure on the Bank of England to raise interest rates into restrictive territory. As result of this and other recent developments, we’re becoming more confident in our view that interest rates will rise from 1.00% now to 3.00% next year. What’s more, although we are forecasting a 25 basis point rate hike at the Bank’s next policy meeting on 16th June, we think a 50 basis point hike is a bit more likely than the 10-20% chance priced into the markets.

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.

UK Economics Weekly

Will the MPC still raise interest rates if there’s a recession?

It looks as though the economy is halfway towards a recession. Although the Monetary Policy Committee has never raised interest rates during a recession before (the last time it happened was in 1975), our forecast that next week’s CPI release will reveal that inflation jumped to a 40-year high of 9.2% in April means that the MPC may have to break new ground.

UK Economics Weekly

Weakening economy won’t do the MPC’s job

The Bank of England’s prediction that the economy is on the brink of recession grabbed the headlines this week, but we suspect its GDP forecast will prove too downbeat. That’s not to say the risk of recession isn't real. But the bigger point of difference is that while the Bank expects the weaker economy to solve the issue of soaring inflation, we think it will require interest rates rising further than most people expect, to 3.00% next year. UK Housing Drop-In (10th May 10:00 BST/17:00 SGT): Economists from our property team are hosting a 20-minute briefing to explain why we think UK house prices are heading for a fall – and how bad the fallout will be. Register now.

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