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We expect Ofgem to announce today that the default tariff cap will increase by 80% in October.
This will boost CPI inflation by 4pp, assuming the ONS treats the government's grant as a fiscal transfer.
Core goods inflation, however, is set to fall sharply this winter; manufacturers and retailers have excess stock.
Sterling has dropped, despite a sharp rise in Bank Rate expectations, because expected inflation has soared.
But the MPC will have flexibility if, as we expect, core inflation falls, boosting the expected real rate.
We expect the U.S. Fed to be more cautious than investors expect, easing some of the pressure on the MPC.
Interest payments look set to be about £37B higher in 2022/23 than the OBR forecast in March.
So the next PM will have to borrow more this year than last to have a fighting chance of averting a recession.
We expect Ms. Truss to unveil tax cuts and extra grants worth an extra £20B this year, and £44B in 2023/24.
The U.K.'s relatively high rate of CPI inflation is largely due to government policies.
The energy price shock has been softened by grants, not tax cuts; VAT and NICs hikes have also played a role.
Higher core goods inflation than in the Eurozone is largely due to Brexit, not stronger underlying demand.
Dave Ramsden is the first MPC member to admit rates might need to be cut "quite quickly" in the medium term.
The cuts currently priced-in by markets from late H2 2023 aren't big enough to lower households' interest bill.
But CPI inflation won't be near the target until Q4 2023; pre-election fiscal stimulus will limit the scope for easing.
The MPC's forecasts signal clearly that markets' medium-term expectations for Bank Rate are too high.
But concerns about persistence in domestic price setting, and looser fiscal policy, will spur further hikes.
We now expect the MPC to raise Bank Rate to 2.00% in September and 2.25% in November, and then to pause.
The effective interest rate on the stock of mortgages rose by only 11bp in H1, but will jump by 30bp in H2...
...and by a further 30bp over the course of 2023, if markets are right about the path for risk-free rates.
Firms still are very exposed to movements in short- rates; the transmission mechanism remains powerful.
Households saved much less and borrowed more in Q2; real spending, therefore, likely was unchanged from Q1.
On paper, households have ample scope to reduce their saving rate further, but we see several constraints.
Some already have depleted savings, credit conditions are tightening, and deleveraging will be more attractive.
The BoE is considering active gilt sales that would result in a reduction in the APF of £50B-to-£100B in year one.
This implies active sales of £15B-to-£65B if they begin in Q4; we expect sales at the lower end of that range.
The CBI’s Distributive Trades Survey shows retailers’ stock levels are far too high; discounting will intensify.
U.K. Document Vault, Pantheon Macro, Pantheon Macroeconomics, independent macro research, independent research, ian shepherdson, economic intelligence