The combination of the Fed’s more hawkish tone and the larger-than-expected rise in UK CPI inflation in May to 2.1% has led the financial markets to bring forward their expectations of when the Bank of England will raise interest rates from around the end of 2022 to shortly after the middle of 2022. Our forecast that inflation will fall back below 2.0% next year suggests that policy won’t be tightened until later, perhaps not until 2024. What’s more, when the Bank does start to tighten policy, we think it will unwind some quantitative easing first before raising interest rates, perhaps in 2025. This suggests there is scope for market rate expectations to fall back and the recent flattening of the gilt yield curve to be reversed.
We are hosting a Drop-In at 1400 BST/0900 ET on Thursday 24th June shortly after the MPC meeting to discuss if the Bank of England will soon follow the Fed by signalling a willingness to bring forward the withdrawal of policy support. You can register here.
Become a client to read more
This is premium content that requires an active Capital Economics subscription to view.
Already have an account?
You may already have access to this premium content as part of a paid subscription.
Sign in to read the content in full or get details of how you can access it
Register for free
Sign up for a free account to gain:
- Unlock additional content
- Register for Capital Economics events
- Receive email updates and economist-curated newsletters
- Request a free trial of our services