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Even more caution than usual should be exercised when using UK overnight indexed swap (OIS) rates to infer the expected path of Bank Rate over the next couple of years. This is because they have risen by far more than the yields of Gilts with comparable …
15th September 2022
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%) …
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
Notwithstanding the big policy announcements in the UK this week, we still think that the pound and the UK stock market will struggle over the rest of this year, but expect 10-year Gilts to rally. We set out what we think the “Energy Price Guarantee” …
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
This week’s warnings from industry leaders about the adverse impact of rising energy bills on their operations should serve as a reminder to the incoming Prime Minister that the recent surge in wholesale gas prices will affect more than just the …
2nd September 2022
The new Prime Minster should acknowledge the size of the economic crisis, announce measures to shelter households and businesses from it, leave the Bank of England’s mandate largely unchanged, create a more constructive relationship with the EU and …
Our forecast that the energy crisis will push the euro-zone and UK economies into recession while the US gets away with a milder slowdown suggests that the euro and the pound will weaken further against the US dollar. We think the pound will fall from …
31st August 2022
Outlook for credit weakening The decent rise in consumer credit values in July may overstate the current resilience of real consumer spending as credit is being supported by the rapid increases in consumer prices. Either way, as households’ spending power …
30th August 2022
Some resilience in spending The £1.4bn (consensus £1.5bn) increase in consumer credit in July supports other evidence suggesting that consumer spending is not collapsing, although this is obviously before the big hit to households’ spending power from the …
What’s even more scary than today’s announcement that the Ofgem price cap will increase by 80% on 1 st October, from £1,971 to £3,549, is that the cap will leap even further early next year. Our wholesale gas price forecasts point to an increase to over …
26th August 2022
The latest leap in wholesale gas prices means that we now think CPI inflation will rise from 10.1% in July to a peak of 14.5% in January (up from our previous forecast of a peak of 12.5% in October). But as it has become increasingly likely that the …
24th August 2022
One left-field option for alleviating Europe’s gas crisis that has been doing the rounds is the potential for asking Norway to discount the price of its gas exports. This Update looks at eight key questions on the topic. In short, an agreement would …
It’s clear in hindsight that the Bank of England kept monetary policy too loose for too long during the recovery from the pandemic. But that does not mean that the mandate given to it by the government requires change. In fact, making radical changes to …
23rd August 2022
Only a matter of time before PMIs point to a recession With the latest surge in wholesale gas prices set to intensify the cost of living crisis, it is probably only a matter of time before the activity PMIs start ringing the recession alarm bell. We think …
PMIs not pointing to a recession…yet Even though the S&P Global/CIPS composite flash PMI stayed above the no-change level of 50.0 in August, it probably won’t be long before it joins other indications suggesting that the economy is already in recession. …
Our existing forecast envisages 25 basis point (bps) hikes at the Bank of England’s September and November policy meetings. But given the data released over the past week, we now would not be at all surprised if the Bank were to deliver a second 50bps …
19th August 2022
Signs of consumer resilience, another borrowing overshoot We doubt the recent resilience in consumer spending will last for much longer. Even so, July’s rise in retail sales provides another reason to think that the Bank of England will raise interest …
Upward surprise will keep Bank of England in hawkish mode The encouraging evidence that the upward pressure on underlying inflation from global factors has started to ease will be of little comfort to the Bank of England given the signs that this is being …
17th August 2022
Jobs market still hot even as economy contracts June’s labour market figures revealed further evidence that the weaker economy is leading to a slightly less tight labour market. That said, by any metric the labour market is still exceptionally tight. And …
16th August 2022
Recent trends suggest that where US inflation goes, UK inflation follows. (See Chart 1.) So this week’s US inflation figures, which suggested that headline inflation in the US may have peaked, appears to offer some hope for the UK. Chart 1: CPI Inflation …
12th August 2022
Contraction in Q2 unlikely to be just a blip The 0.6% m/m drop in GDP in June was mostly due to the adverse effect of the extra Jubilee bank holiday. Even so, the GDP figures confirmed that the economy contracted by 0.1% q/q in Q2 as a whole and we have …
We expect a recession in 2022/23 to be driven by high inflation, with a contraction in real consumer spending at its epicentre. But with household and corporate balance sheets still relatively healthy, we suspect the recession will be mild by historical …
11th August 2022
We’ve been warning for some time that CPI inflation would rise further than most people expect, triggering a recession. The prospect of even bigger rises in utility prices on 1 st October and in the first half of 2023 than we have pencilled in suggests …
10th August 2022
A rise in Bank Rate to a peak of 3.00% wouldn’t dent real consumer spending anywhere near as much as the drag from surging inflation over the coming quarters. That said, it would only compound the downward impact on spending, which reinforces our view …
9th August 2022
The Bank of England’s decision to step up the fight against high inflation by raising rates by 50 basis points (bps) from 1.25% to 1.75% was in line with our expectations. Moreover, we have been saying for some time that the UK economy would soon fall …
5th August 2022
While raising interest rates by 50 basis points (bps) today, from 1.25% to 1.75%, the Monetary Policy Committee (MPC) suggested that rates will probably have to rise further to knock on the head the recent rises in price/wage expectations, but that a …
4th August 2022
The fall in 10-year gilt yields from 2.60% in late June to 1.95% now has been in line with the global trend and shows that the markets are looking through the further near-term rises in inflation and interest rates and focussing more on the risks of …
29th July 2022
Given our forecast that the Bank of England will raise interest rates from 1.25% now to a peak of 3.00%, we still think that gilt yields have further to rise. However, with attention in the markets turning towards the prospect of lower inflation and …
Consumers borrowing more to cope with higher inflation The chunky increase in unsecured borrowing in June suggests that households are having to rely more on credit due to the cost of living crisis. But households won’t be able to fully offset the hit to …
MPC to raise rates by a bigger 50bps and to leave the door open to more 50bps hikes Our forecast that rates will peak at 3.00% remains higher than the consensus forecast of 2.00% Bank takes another step closer to gilt sales We expect the Monetary Policy …
28th July 2022
Who would have thought that one of the most noteworthy parts of the news on the UK economy this week would be the government’s debt interest payments on its index-linked gilts? But with the battle to become the next Prime Minister reaching its final …
22nd July 2022
Pipeline price pressures have peaked Spending on travel and leisure is supporting activity and has so far prevented the UK composite flash PMI from joining the euro-zone’s PMI in contraction territory. Perhaps even more encouraging was that price …
Higher prices dragging underlying sales volumes lower Although June’s retail sales figures were boosted in some areas by the extra Jubilee bank holiday and dragged down in others, the underlying trend is that the surge in prices is weighing on sales …
Borrowing overshoot will limit next PM’s ability to help households June’s public finances figures provided more evidence that the government’s fiscal position is worse than the Office for Budget Responsibility (OBR) predicted back in March. This may …
21st July 2022
Global pressures peaking, domestic pressures strengthening There are some encouraging signs that the upward pressure on underlying inflation from global factors has started to ease. But as it is being replaced by stronger upward pressure from domestic …
20th July 2022
Jobs market still hot even as the economy slows The strong rise in the supply of workers in May helped to take some of the heat out of the labour market. Even so, the sharp increase in employment and pick-up in wage growth supports our view that the Bank …
19th July 2022
The apparent race to the bottom on taxes slowed this week with the candidates that had pledged to loosen fiscal policy the most if they became Prime Minister either withdrawing from the contest or being eliminated in the first two rounds of voting by MPs. …
15th July 2022
Resilience unlikely to last The recent resilience of GDP to the drag from the high rate of inflation probably won’t last and there is still a big risk that the economy falls into recession. Even so, the surprisingly strong rise in GDP in May might …
13th July 2022
Weak economy may lead to looser fiscal policy There are two reasons why whoever fills Boris Johnson’s shoes as Prime Minister after his resignation this week is unlikely to significantly change the path of policy or the economy. First, all PM hopefuls …
8th July 2022