Incoming data are consistent with our forecast for a sharp fall in house purchases and an 8% drop in prices.
The MPC, however, won’t keep Bank Rate at 4% indefinitely; house prices should rebound in the mid-2020s.
Mortgage payments’ share of incomes will not return to 2010s levels; hefty rent rises have raised the floor.
Samuel Tombs (UK Economist)U.K.
Sterling's rally has been driven by the elimination of the fiscal risk premium, which we doubt will return...
...But the current account deficit will remain large next year, despite the recession, leaving sterling vulnerable.
The MPC likely will hold back from raising Bank Rate as far as markets expect; we look for $1.15 in the spring.
Samuel Tombs (UK Economist)U.K.
- The OBR's forecast for the effective mortgage rate looks
implausibly high; we expect a smaller drop in RHDI...
- ...But its forecast for the saving rate to fall to a joint-record low, supporting spending, jars with past experience.
- The saving rate usually rises when the unemployment rate increases; rising rates will spur debt repayments.
Samuel Tombs (UK Economist)U.K.
- Continued momentum in core price rises was partly to blame for the upside inflation surprise in October.
- The recent fall in shipping costs and slowing in producer price rises, however, points to a better trend soon.
- Recessions reliably crush domestically-generated inflation; we still see a sub-2% headline rate in 2024.
Samuel Tombs (UK Economist)U.K.
- The U.K. is the only G7 country in which GDP fell in Q3
and has never recovered to its pre-Covid peak.
- Households’ real spending will keep falling until the end of 2023, as fiscal and monetary headwinds intensify.
- Higher interest rates will weigh on business investment and trigger a sharp downturn in residential investment.
Samuel Tombs (UK Economist)U.K.
- The MPC’s forecasts suggest it needs to raise Bank Rate only by a further 50bp to hit the 2% inflation target.
- The required tightening could be even smaller, depending on the size and timing of upcoming fiscal measures.
- The MPC, however, still is nervous about upside inflation risks, so we still expect Bank Rate to rise to 4.0%.
Samuel Tombs (UK Economist)U.K.
- We expect the MPC to hike Bank Rate by 75bp next week, but to signal smaller hikes at future meetings.
- On the face of it, its new forecast for inflation will endorse the path for Bank Rate expected by markets...
- ...But it won’t incorporate the upcoming fiscal tightening; expect the MPC to emphasise the downside risks.
Samuel Tombs (UK Economist)U.K.
- October’s PMI data point to a worsening recession; a 0.5% quarter-on-quarter drop in Q4 GDP looks likely.
- Price rises are slowing, but remain too brisk for the MPC to take breath; we look for a 75bp hike next week.
- Further falls in interest rate expectations will weigh on sterling now the fiscal credibility gap has largely gone.
Samuel Tombs (UK Economist)U.K.
- Employment was broadly flat in Q3, but the recent jump in firms' borrowing costs signals a big fall ahead.
- Long-term sickness looks set to rise further, but government policies likely will boost the workforce in 2023.
- We expect the unemployment rate to peak at about 5.5%, easily high enough to subdue wage growth.
Samuel Tombs (UK Economist)U.K.
- Over three-quarters of firms’ bank loans are floating rate; interest payments will absorb 20% of profits soon.
- In total, firms’ financial assets are worth more than bank & bond debt, but they are mismatched between firms.
- The change in firms’ borrowing costs has been a good leading indicator of employment and capex in the past.
Samuel Tombs (UK Economist)U.K.
- A recession now is all but inevitable; the key questionis how the pain will be distributed.
- Hiking Bank Rate to 6% would crush domestically-generated inflation; mortgage defaults would soar.
- Hiking more slowly would depress sterling and boost imported inflation, but is the lesser evil for the MPC.
Samuel Tombs (UK Economist)U.K.
- Tax cuts which disproportionately benefit the top 1% of earners will do little to boost demand.
- Most households are worse off, because the associated depreciation of sterling will raise the price level by 1.5%.
- Mr. Kwarteng likely will impose tough spending limits in the Budget, to try to reverse the jump in gilt yields.
Samuel Tombs (UK Economist)U.K.
- The improved near-term outlook for CPI inflation has left the MPC less anxious about second-round effects.
- The MPC is awaiting more details on fiscal policy; a 75bp hike in November can't be ruled out...
- ...But the proposed tax cuts will do little to boost GDP, and spending might be cut; we still expect a 50bp hike.
Samuel Tombs (UK Economist)U.K.
- The effective interest rate for all mortgages has risen only slowly to date, but now looks set to soar...
- ...As a rising number of borrowers refinance, and as lenders respond to the further jump in risk-free rates.
- Expect a 1pp disposable income hit in 2023 if Bank Rate tops 4%, or a 0.7pp drag if Bank Rate tracks our forecast.
Samuel Tombs (UK Economist)U.K.
- We think the MPC will raise Bank Rate by 50bp next week, despite other central banks rushing ahead...
- ...Q3 GDP is set to undershoot the MPC’s latest forecast, while the inflation outlook has improved greatly.
- Proposed tax cuts are too small to move the inflation needle, and likely will be partly funded by spending cuts.
Samuel Tombs (UK Economist)U.K.
- The month-to-month change in the August core CPI exceeded its seasonal norm by the least this year.
- The recent decline in commodity prices suggests core CPI inflation will fall sharply next year.
- Services inflation will be stickier, but the current support from energy price rises and VAT changes will fade.
Samuel Tombs (UK Economist)U.K.
- Business surveys and vacancy data point to another negligible rise in payroll employees in August.
- Wage growth likely remained slightly too strong for the MPC, but probably didn't gain more momentum.
- BRC data point to a below-consensus fall in retail sales in August; the MPC won't up the hiking pace.
Samuel Tombs (UK Economist)U.K.
- The average household will spend less on energy over the next six months than during the last six.
- So a winter recession now looks unlikely, and the MPC can return to focussing on core CPI inflation.
- Fiscal policy will stabilise demand, not lift it; job market slack still looks set to emerge, limiting rate hikes.
Samuel Tombs (UK Economist)U.K.
- CPI inflation likely fell to 9.9% in August, from 10.1% in
July, returning to the level forecast by the MPC.
- A slump in motor fuel CPI inflation likely dominated the further pick-up in food inflation.
- BRC data show the pace of core goods price rises eased in August; July's large jump in rents won't be repeated.
Samuel Tombs (UK Economist)U.K.
