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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 …
27th September 2022
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
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 …
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
