When will vaccines unlock the economy?
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When will vaccines unlock the economy?

We don’t know exactly how long the third English lockdown, which started on 5th January, will last. Government ministers have talked about schools being closed until mid- or late-February, but the lockdown legislation MPs voted into law on Wednesday has an end date of 31st March. In our latest set of economic forecasts, published here, we have assumed that schools…
Thomas Pugh UK Economist
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More from UK Markets

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

BoE Watch

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

28 April 2022

UK Markets Chart Book

Financial conditions as tight as after the Brexit vote

The war in Ukraine has contributed to a tightening in financial conditions that will contribute to weaker GDP growth for the rest of this year and next year. Admittedly, a lot of the initial plunges in UK equity prices and gilt yields have been reversed. But the lasting financial market effects from the war in Ukraine so far appear to be higher commodity prices, higher interest rate expectations and wider corporate bond spreads. That’s why UK financial conditions have tightened to levels similar to those seen after the EU Referendum in 2016. While this will weigh on GDP growth this year and next, the tightening seen so far doesn’t pose a systemic risk.

29 March 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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