We’ve been surprised that the rise in Bank Rate from 0.10% in November 2021 to 4.25% hasn’t triggered a contraction in GDP at the start of this year. Indeed, while higher interest rates were a further drag on net mortgage lending in March, the performance of other interest rate sensitive areas hasn’t been very weak and in fact has recently improved. It may be that the boost to nominal household incomes from fast wage growth and government handouts is supporting activity. Or that the fading drag on real incomes from inflation has driven the recent improvement. Either way, the economy’s resilience combined with the stickiness of both core inflation and price/wage expectations raises the chances that interest rates will need to rise further than our forecast of a peak of 4.50% and/or stay higher for longer to generate the economic weakness required to reduce inflation from over 10% to the 2% target.
UK Drop-In (11th May): Join our UK and Markets teams for this special briefing on the Bank of England’s May decision at 10:00 EDT/15:00 BST on Thursday, 11th May. Register Now.
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