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“Dear, oh dear”. King Charles neatly summed up the thoughts of the nation with those three words when he greeted the Prime Minister, Liz Truss, on Wednesday for their weekly meeting. The big question is who will the King be greeting next week? Will it be …
14th October 2022
Government still has a lot more to do to restore credibility Today’s sacking of the Chancellor and reversal of more of the tax cuts included in the mini-budget creates some downside risks to our forecast that interest rates will rise from 2.25% to 5.00% …
UK Drop-In: Does the fall of Kwasi Kwarteng mark an end to the UK’s crisis? …
Economy contracts as markets fret The contraction in real GDP in August won’t ease the jitters in the financial markets at a time when the recent behaviour of politicians and the words of the Governor of the Bank of England are making the markets …
12th October 2022
Economy losing more momentum as the markets fret The 0.3% m/m fall in GDP in August (consensus and CE 0.0%) won’t ease the jitters in the financial markets at a time when the recent behaviour of politicians and the words of the Governor of the Bank of …
Central banks have the tools to deal with liquidity crises arising from rising interest rates and falling asset prices. Instead, the bigger threat is that higher interest rates produce large and simultaneous falls in asset prices that threaten the …
11th October 2022
Note: This report has been updated in the 6th paragraph to reflect 11th Oct. comments from BoE Governor Andrew Bailey. Given that the surge in gilt yields that has forced the Bank of England to intervene in the market was initially driven by the …
Labour market won’t make the Bank of England’s task any easier While there were tentative signs that the labour market is cooling from the red-hot conditions seen in recent months, the shortfall in labour supply is keeping it exceptionally tight. That …
Labour market won't make the Bank of England's task any easier While there were tentative signs that the labour market is cooling from the red-hot conditions seen in recent months, the shortfall in labour supply is keeping it exceptionally tight. That …
The Prime Minister, the Chancellor and investors will probably all be breathing a huge sigh of relief today as there was no guarantee that they would end the week in the same positions as they started it. But the lesson from the past couple of weeks is …
7th October 2022
If interest rates rise from 2.25% to 5.00%, as we now expect, we think the economy will suffer a deeper recession involving a 2% peak-to-trough fall in real GDP. That may result in the unemployment rate rising from 3.6% in July to 5.5% and may …
5th October 2022
The government-induced turmoil in the markets this week has altered our thinking in five key ways. First, we have raised our forecast for the peak in interest rates from 4.00% to 5.00%. At the end of last week, we had thought that the tax cuts announced …
30th September 2022
If the UK government’s “new era of fiscal policy” boosts GDP growth as planned, the UK’s long-term prospects will be much improved. But the action announced so far will not achieve this. It is even possible that, by denting the UK’s fiscal credibility, …
Looser fiscal policy to send cost of borrowing soaring The surge in interest rate expectations since the Chancellor’s “mini-budget” will sharply raise the cost of borrowing in the economy. We now expect Bank rate to reach a peak of 5.00% which will push …
Looser fiscal policy to send cost of borrowing soaring August’s money and credit figures suggest that in August consumers were starting to adjust their borrowing and savings behaviour in response to higher inflation. The £1.1bn rise in consumer credit …
Smaller economy a blow to Chancellor’s fiscal plans The good news is that the economy is not already in recession. The bad news is that contrary to previous thinking, it still hasn’t returned to pre-pandemic levels. It’s the only G7 economy in that …
Smaller economy makes Chancellor’s fiscal plans look even more untenable The good news is that the economy is not already in recession. The bad news is that contrary to previous thinking, it still hasn’t returned to pre-pandemic levels. It’s the only …
Mini-budget forces BoE to step in to prevent financial crisis The continued fallout this morning from the Chancellor’s mini-budget has forced the Bank of England to step in to avoid the early stages of a financial crisis. It has postponed its plan to sell …
28th September 2022
In response to the government’s loose fiscal plans and the resulting weakening in the pound, we now think that interest rates will rise from 2.25% now to a peak of 5.00% (4.00% previously). Rates at those levels make the housing market look very …
27th September 2022
The rise in market interest rates that has already happened will push up mortgage rates to at least 6% and reduce the size of loans that lenders can offer. The resulting drop in buying power makes a significant drop in house prices inevitable. Many …
Long-term fiscal sustainability is governed by what happens to a combination of economic growth, government borrowing costs and the primary budget balance. Since we’re sceptical that the tax cuts announced by Kwasi Kwarteng last week will boost …
Investors have revised up how far they expect the Bank of England to raise interest rates as they continue to digest the tax cuts announced on Friday. This Update examines what the impact on the housing market would be, and whether that could prevent …
Govt and BoE do the bare minimum, markets may yet force the issue It remains to be seen whether today’s statement by the government and the Bank of England will be enough to ease the markets’ fears about the government’s fiscal policy. The initial …
26th September 2022
BoE needs to get on front foot with big rate hike The further fall in the pound in early trading means that we’ve now reached the point where the Bank of England needs to step in in order to regain the initiative. There are a couple of ways it could do …
The financial markets delivered their verdict on Chancellor Kwasi Kwarteng’s “Growth Plan” immediately after it was revealed Friday morning. There was carnage in the gilt market with 2-year yields rising by over 40 basis points (bps) to 3.95% (the …
23rd September 2022
The Chancellor claimed that this was a plan for growth. But unless the Chancellor’s gamble pays off and the government’s fiscal policy boosts GDP growth by 0.5-1.0ppts per annum, the risk is that once the near-term boost to GDP fades, the legacy of the …
PMIs pointing to a recession The slip in the composite flash PMI to 48.4 in September took it further below the boom-bust level of 50 and sits comfortably with recent data that suggests the economy is already in a recession. That’s hardly a good start …
Chancellor gambles everything on growth The Chancellor claimed that this was a budget for growth. But unless the Chancellor’s gamble pays off and the government’s fiscal policy boosts GDP growth by 0.5-1.0ppts per annum, the risk is that once the …
The hawkish 50 basis point (bps) hike in interest rates today, from 1.75% to 2.25%, was partly driven by the government’s plans to dramatically loosen fiscal policy and supports our view that the Bank of England will raise rates to a peak of 4.00% and …
22nd September 2022
Govt’s fiscal plans to force the Bank to raise rates to 4.00% The 50 basis point (bps) rise in interest rates today was partly driven by the government’s extraordinary fiscal plans that are expected to be confirmed in a not-so-mini-budget tomorrow. It’s …
A key prong to the new PM’s economic policy is to increase the size of the economic pie, rather than redistributing it, seemingly funded by higher public borrowing. If the new government’s gamble on GDP growth pays off and it hits its 2.5% real GDP growth …
21st September 2022
Fiscal stimulus will put borrowing back on upward trend The public finances figures brought some cheer for the new Chancellor, Kwasi Kwarteng, ahead of his fiscal statement on Friday. That said, the government’s huge fiscal expansion and the weakening …
Borrowing trend still worrying, despite recent improvement The public finances figures brought some cheer for the new Chancellor, Kwasi Kwarteng, after the run of fairly poor outturns seen so far this fiscal year. That said, the government’s big fiscal …
According to media reports, in his mini-Budget slated for Friday 23 rd September, the new Chancellor, Kwasi Kwarteng, intends to officially set a target of real GDP growth of 2.5% a year. At first glance, 2.5% economic growth would appear to be within …
16th September 2022
Downward momentum gathering pace The weakness in August’s retail sales volumes figures suggests that the downward momentum is gathering speed and supports our view that the economy in already in a recession. But that won’t stop the Bank of England from …
Downward momentum gathering The 1.6% m/m drop in retail sales volumes in August (consensus -0.5%, CE -2.0%) supports our view that the economy is already in recession. Retail sales will probably continue to struggle as the cost of living crisis hits …
After fully adjusting our economic forecasts to take account of what is shaping up to be a big fiscal expansion, we now think the Bank of England will raise interest rates from 1.75% currently to a peak of 4.00% next year (our previous forecast was 3.00%) …
15th September 2022
Not peaked yet Despite CPI inflation easing from 10.1% in July to 9.9% in August, inflation has not peaked yet. We think CPI inflation will rise to 11.0% later this year and that the tight labour market will keep underlying inflationary pressures strong …
14th September 2022
Inflation has not peaked yet The easing in CPI inflation from 10.1% in July to 9.9% in August (consensus forecast and CE 10.2%, BoE 9.9%) is a bit of a relief after yesterday’s US CPI shocker, but overall and core UK CPI inflation haven’t peaked yet. As …
Large shortfall in labour supply keeps labour market exceptionally tight With further evidence that the weaker economy is leading to a cooling in labour demand, the renewed fall in the unemployment rate to a new 47-year low of 3.6% was driven by a …
13th September 2022
Only faint signs of a loosening in the labour market The further fall in the unemployment rate to a new multi-decade low of 3.6% in July together with the extra pick-up in wage growth will increase the pressure on the Bank of England to deliver another 50 …
The economy may already be in recession The disappointingly small rebound in real GDP in July suggests that the economy has little momentum and is probably already in recession. The government’s utility price freeze is unlikely to change that. The 0.2% …
12th September 2022
The passing of HM Queen Elizabeth II has brought a sadness to the UK. The official 10-day mourning period will bring a halt to some government business. The Bank of England has postponed the Monetary Policy Committee meeting scheduled for Thursday 15 th …
9th September 2022
Another 50 bps hike, a 75 bps increase is not out of the question PM’s fiscal expansion means Bank may have to raise rates further to hit 2% inflation target Rates to peak at 4.00% Although the new Prime Minister, Liz Truss, has saved some of the …
8th September 2022
It seems that the size and structure of the Prime Minister’s policy to freeze utility prices is broadly as expected and will reduce inflation and limit the size of the recession. But it will come at the cost of higher interest rates and higher government …
Lower inflation and smaller recession, but higher interest rates and more govt debt It seems that the size and structure of the Prime Minister’s policy to freeze utility prices is broadly as expected and will reduce inflation and limit the size of the …
The possible policy of the new Prime Minister, Liz Truss, to freeze the utility price cap at £2,500 until sometime in 2024 will dramatically lower the near term path for CPI inflation. Rather than rise from 10.1% in July to around 14.5% in January, it …
7th September 2022
If the new Truss government implements a freeze on domestic gas and electricity prices then inflation may peak at around 11% in October this year, rather than 14.5% in January next year as we currently forecast. The economy is still likely to enter …
6th September 2022
Fiscal plans of Truss may limit depth of recession, but result in higher interest rates The news that Liz Truss will become the new Prime Minister tomorrow suggests that a big loosening in fiscal policy will limit the depth of the recession, but that …
5th September 2022
