Rate hikes still a long way off, despite stronger economy

Given the better starting point and improving economic outlook, it would be a surprise if the Monetary Policy Committee (MPC) didn’t come out with a stronger set of economic forecasts than it had in February at its next meeting on Thursday 6th May. But we think that it will use the policy statement to push back against the markets’ expectation that interest rates will rise within the next year. Instead, we think it will be 2025 before the MPC decides to raise rates.
Thomas Pugh UK Economist
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UK Data Response

Public Finances (Dec.)

Stronger tax revenues were just enough to offset big rises in debt interest costs in December. But we don’t expect this to last: further rises in inflation will mean borrowing soon overshoots the OBR’s forecast. Even so, our forecasts suggest the Chancellor still has enough fiscal space to cancel April’s rise in NIC taxes. Drop-In (14:00 GMT, 26th Jan): UK Outlook -- More inflation, more interest rate hikes. Join our UK Economics team for a briefing on the 2022 outlook, including why we’re below consensus on growth but think the BoE will raise rates more than most expect. Register here.

25 January 2022

UK Data Response

IHS Markit/CIPS Flash PMIs (Jan.)

The third consecutive decline in the composite PMI indicates that the Omicron variant weighed further on activity in January. But the recent fall in COVID-19 cases, relaxation of restrictions and signs of easing supply shortages suggest the economy will recover quickly. And, given signs of accelerating price pressures, we still expect the Bank of England to hike interest rates a week on Thursday. Drop-In (14:00 GMT, 26th Jan): UK Outlook -- More inflation, more interest rate hikes. Join our UK Economics team for a briefing on the 2022 outlook, including why we’re below consensus on growth but think the BoE will raise rates more than most expect. Register here.  

24 January 2022

UK Economics Weekly

Economy less favourable for whoever’s in Number 10

Although it is hard to predict whether by the end of next week Boris Johnson’s reign as Prime Minister will be solidifying or crumbling, we know that whoever is in Number 10 over the next year will have to deal with the cost of living crisis. Our forecast that inflation will rise to a little above 7% explains why we think GDP growth this year will fall short of the consensus forecast and why we think interest rates will be raised further than most expect, from 0.25% now to 1.25% by the end of the year. Drop-In (14:00 GMT, 26th Jan): UK Outlook -- More inflation, more interest rate hikes. Join our UK Economics team for a briefing on the 2022 outlook, including why we’re below consensus on growth but think the BoE will raise rates more than most expect. Register here.

21 January 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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