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While gilt yields could drop further if the war in Ukraine escalates much further and/or it becomes clear that it is significantly reducing economic activity in the UK, at the moment we think gilt yields are more likely to rise over the next two years. …
2nd March 2022
Weaker borrowing likely to persist The muted rise in consumer credit in January suggests that the Omicron wave was still prompting households to exercise caution at the start of this year. With interest rates rising and the cost of living crisis only set …
1st March 2022
As it stands at the moment, we still think that the Russian/Ukraine conflict is more likely to boost inflation in the UK by more than it reduces GDP growth and that the Bank of England will continue to raise interest rates at the next few policy meetings. …
28th February 2022
The Bank of England has yet to provide any clues to how Russia’s invasion of Ukraine on Thursday may influence how far and how fast interest rates need to rise. (All our analysis on the conflict is collated on one page of our website. See here .) The …
25th February 2022
Today’s grave escalation of the Russia/Ukraine conflict threatens to keep CPI inflation in the UK even further above the 2% target this year and reduce households’ real incomes by even more. The conflict probably won’t prevent the Bank of England raising …
24th February 2022
Our forecast that lingering price pressures will prompt the Bank of England to raise interest rates from 0.50% now to a peak of 2.00% next year suggests there is little scope for market interest rate expectations to rise further. Even so, we think that an …
Borrowing in the black, but inflation still a burden Public sector net borrowing was in surplus in January as the figures were flattered by the usual bump from higher income tax receipts. Nonetheless, it was a smaller surplus than the Office for Budget …
22nd February 2022
Omicron just a blip, more signs of supply shortages easing February’s punchy flash PMIs provide even more evidence that the economy has rebounded swiftly after the hit from Omicron. And beneath the headline numbers, there are tentative but encouraging …
21st February 2022
Earlier this week brought murmurs of a de-escalation in the Russia/Ukraine border crisis. But tensions seem to have flared up again in recent days. We have no particular insight on the likely outcome, but we can offer some thoughts on the economic impact …
18th February 2022
Omicron recovery underway, but cost of living crisis beginning to bite A solid rebound in retail sales in January suggests the hit to activity from Omicron was smaller and shorter than previously thought. Even so, the cost of living crisis will restrain …
CPI inflation may rise to a peak of nearly 8.0% in April The rise in CPI inflation in January from 5.4% to a new 30-year high of 5.5%, the latest rise in oil prices and the new item weights mean that we now think CPI inflation will rise to a peak of 7.9% …
16th February 2022
A recipe for further interest rate hikes Employment has recouped the falls after the furlough scheme, the unemployment rate has fallen to pre-COVID levels, job vacancies are at a record high and wage growth is rising. That’s a recipe for more interest …
15th February 2022
The further surge in US CPI inflation from 7.0% in December to a 40-year high of 7.5% in January and some hawkish comments by US Fed officials have rattled global financial markets this week, with UK markets being caught in the crossfire. And recent …
11th February 2022
Shrugging off Omicron, but big squeeze in real incomes lies ahead When combined with the CPI inflation rate of 5.4%, the 0.2% m/m fall in GDP in December meant that the economy experienced a taste of stagflation at the end of last year. As it was driven …
We estimate that the leap in utility prices and hike in taxes on 1 st April will reduce real household disposable incomes over the next two years by a cumulative £80bn. The resulting 2.0% decline in real incomes in 2022 will be the largest on record. (See …
10th February 2022
We now think that Bank Rate will rise from 0.50% currently to 1.25% sooner than we previously thought. What’s more, we now expect three more 25 basis point (bps) rate rises in 2023, resulting in rates ending next year at 2.00%. That compares to the …
9th February 2022
What came through most clearly in yesterday’s Monetary Policy Committee (MPC) statement was the signal that the MPC will act to quash rising cost, price and wage expectations. We unpacked the Bank of England’s February meeting, at which it raised interest …
4th February 2022
While the decisions by the Bank of England to hike interest rates from 0.25% to 0.50% and to start reversing quantitative easing (QE) were both as expected, with four MPC members wanting to raise rates to 0.75% and all members deciding to sell the …
3rd February 2022
Omicron didn’t put a big dent in household borrowing The decent rise in consumer credit in December suggests that, although consumers exercised a touch more caution as Omicron COVID-19 cases surged at the end of last year, the economy didn’t collapse. …
1st February 2022
It is possible that equity prices will continue to struggle in the near term if central banks send more signals that they are willing to raise interest rates further in order to control inflation. But without a significant economic downturn or recession …
31st January 2022
Prime Minister Boris Johnson is in a precarious position. With Sue Gray’s (delayed… again) report on ‘Partygate’ due to be published at some point in the next few weeks and the police now conducting a criminal investigation into the scandal, support for …
28th January 2022
The unfavourable growth/inflation trade-off has worsened We think investors are right to price in an interest rate hike in February to 0.50% And we expect rates to rise to 1.25% by end-2022, further than most anticipate The further surge in inflation …
27th January 2022
Inflation a headache, but Chancellor still has wiggle room 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 …
25th January 2022
Omicron hangover to be short-lived, signs of shortages easing 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 …
24th January 2022
While Boris Johnson has survived another week without a formal challenge on his leadership, next week’s publication of the (delayed) report on “Partygate” by Sue Gray may well determine his fate one way or the other. We highlighted in last week’s UK …
21st January 2022
Huge fall points to bigger Omicron hit The fall in retail sales volumes in December was bigger than expected and supports our view that the Omicron outbreak in the run-up to Christmas may have dragged down GDP by 0.5% m/m, if not more. The 3.7% m/m fall …
The looming squeeze on real wages means that the near-term outlook for consumption and GDP has weakened. That said, we don’t expect anything as bad as the squeeze in 2008-14. In fact, real household disposable income may well recover by early 2023. Real …
20th January 2022
Target-busting inflation heading to 7% After rising from 5.1% in November to 5.4% in December, CPI inflation is now further above the Bank of England’s target than at any point since the UK first adopted an inflation target in October 1992. (See Chart 1.) …
19th January 2022
Coping with furlough and Omicron, but real wages will fall further The labour market appears to have tightened after the end of the furlough scheme and at the start of the Omicron wave. So even though real wages are now falling and will decline further, …
18th January 2022
It is striking how quickly the political momentum has shifted. This time last week, Prime Minister Boris Johnson was probably feeling smug about his decision not to ramp up the COVID-19 restrictions in the wake of the Omicron wave. This week, he has faced …
14th January 2022
Omicron may drag GDP back below its pre-pandemic level Although the effects of the Omicron COVID-19 wave will probably mean that the economy falls back below its pre-pandemic peak by January after having surpassed it for the first time in November, that …
While the general perception is that higher inflation is unambiguously good for the public finances, the reality is a bit more nuanced. The Chancellor will almost certainly be gifted with a lower public debt ratio. However, inflation will probably mean …
12th January 2022
With the next few months set to bring higher inflation, utility prices and taxes, the pressure on household finances is mounting. That’s prompted headlines about the looming cost of living crisis. In our key calls Update , we outlined the upward revision …
7th January 2022
Our new forecasts for 2022 envisage CPI inflation rising further than most expect to a peak of 7% and the Bank of England raising interest rates quicker, from 0.25% now to 1.25% by the end of the year. COVID-19 has the capacity to spring more surprises. …
6th January 2022
Given the huge surge in cases throughout December, the COVID-19 situation is once again set to be the biggest determinant of the performance of the economy over the first few months of 2022. We aren’t factoring in any additional UK-wide restrictions, but …
5th January 2022
November’s strength unlikely to have lasted The healthy rise in consumer credit in November adds to evidence that economic activity strengthened in the middle of Q4. But that feels like a distant memory now. Against a backdrop of surging COVID-19 cases, …
4th January 2022
Less momentum going into Q4 Today’s release indicates the economy had a bit less momentum in Q3 than we had previously thought. And, with early signs the Omicron variant has hit activity, growth is sure to have slowed further in Q4. Upward revisions to …
22nd December 2021
Borrowing overshoot could continue in the coming months The rise in government borrowing in November suggests the public finances could be already starting to feel the strain from higher spending on NHS Test & Trace and booster vaccines. Now that tighter …
21st December 2021
Twelve months ago we said that 2021 would bring a “quicker and fuller” recovery, still-loose monetary policy and that the pandemic wouldn’t leave a large permanent dent in the economy and the public finances. (See here .) So we have managed to notch a …
17th December 2021
Black Friday boost, but Omicron threatens Christmas for retailers The strong growth in retail sales in November feels like a bit of a consolation prize for retailers who are now once again facing a difficult Christmas in light of the rapidly worsening …
The surprise hike in interest rates by the Bank of England today, from 0.10% to 0.25%, could just be a case of the Bank moving a bit quicker than expected, but the hawkish tone of the commentary suggests to us that it is now also willing to move a bit …
16th December 2021
Omicron already hitting services hard The fall in the composite PMI in December doesn’t come as much of a surprise given the surge in cases of the Omicron variant of COVID-19. But it was much bigger than expected, and shows that caution among businesses …
The discovery of the Omicron COVID-19 variant in late November rattled UK markets. Equities tumbled, sterling weakened and corporate credit spreads jumped. And, while the initial reaction was not unique to the UK, it does seem that investors remain a bit …
15th December 2021
Inflation close to being further above the target than ever before Inflation is close to being further above the target than at any point since the UK started targeting inflation in October 1992. This makes tomorrow’s interest rate decision look closer, …
Reports that the surge in Omicron COVID-19 cases is causing some people to stay away from work, schools, pubs and restaurants increases the downside risks to our December and January GDP forecasts. But the big step down would happen if there were another …
14th December 2021
Furlough fears fading, COVID-19 concerns climbing Even though the fallout after the furlough scheme was smaller and shorter than the Bank of England had feared, concerns over the deteriorating COVID-19 situation will probably prevent it from raising …
The government’s recently-imposed “Plan B” COVID-19 restrictions mean there is a good chance that the economy contracted in December. If the pressure on the NHS increases, restrictions might be tightened further, implying substantial downside risks to Q1 …
10th December 2021
Touch-and-go whether economy grows or contracts in December The news that the economy was hardly growing at all before Omicron means it is touch-and-go whether it will grow a bit in December or shrink a bit. Against that background, we doubt the Bank of …
A hike this month does not look likely, but is possible Omicron is unlikely to prompt more QE or negative interest rates Lift off to occur early next year, but rates probably won’t rise as far as investors expect We wouldn’t completely rule it out, but we …
9th December 2021
While the emergence of the Omicron COVID-19 variant has increased the downside risks to our GDP forecasts, it has arguably increased the upside risks to our CPI inflation forecasts. The transmissibility, severity and capacity for Omicron to escape …
7th December 2021
