High inflation and interest rates to hit economy hard

The drag on the economy from CPI inflation being stuck at 10% for a year and interest rates rising to 5.00% will be enough to trigger a recession that involves real GDP declining by around 2.0% from its peak to its trough. What’s more, whoever takes over at Prime Minister from Liz Truss will probably have to tighten fiscal policy in the Medium-Term Fiscal Plan on 31^st October (rather than just reverse the previous loosening) to prove their fiscal restraint to the financial markets. As such, it’s possible that the recession will be deeper. Weaker GDP will contribute to an easing in domestic price pressures, but just not soon enough to prevent the Bank of England from raising interest rates from 2.25% now to 5.00%. Once inflation is conquered, the weak economy will mean the Bank pivots to interest rate cuts in 2024.

In view of the wider interest, we are also sending this UK Economics Outlook to clients of our UK Housing Service.