- Investors expect U.K. official rates to rise by 98bp this year, exceeding the 86bp anticipated rise in the U.S.
- U.K. households, however, are less well-placed than those in the U.S. to withstand higher rates.
- The MPC will switch to QT before the Fed, while membership changes will strengthen the doves' hands.
Markets now expect the MPC to hike Bank Rate to 0.50% in February, following today's surprise hike.
Most members, however, thought the decision was "finely balanced" and see a "modest" tightening ahead.
Omicron won't just have short-term effects if the MPC hikes again and pushes firms over the edge.
November's 5.1% CPI inflation rate was 0.6pp above the forecast made by the MPC only last month...
...But high inflation is due to surging energy and goods prices; underlying services inflation remains subdued.
We expect the headline rate to peak at 6.0% in April, but then to fall sharply, slipping below-target in 2023.
The unemployment rate continued to fall in October, despite the end of the furlough scheme.
Some full-time workers have become part-timers post-furlough, but they don't seem to want more hours.
Wage growth, however, slowed to a below-inflation rate in October; the real wage squeeze will get worse.
Trade-weighted sterling has fallen by about 2% since late October; bets on a further drop have intensified.
The U.K. economy is more Covid sensitive than most; the downside risk to rate expectations is greater.
Investors next year increasingly will price-in the risks of a messy outcome to the next general election.
- October's 4.2% rate of CPI inflation was well above the MPC's 3.9% forecast; such a large error margin is rare.
- The upside surprise came from the core, and will carry over to future months; April's peak looks set to top 5%.
- Mean-reversion in energy and goods prices, however, should ensure that CPI inflation dips below 2% in 2023.
- Markets are pricing-in a 65bp rise in Bank Rate by March and expect the first hike to come next week...
- ...But falling consumer confidence, low pay settlements and rising Covid cases strengthen the case for patience.
- November is "live", but markets' conviction is too strong; potential swing voters on the MPC have been very
- This month's Stamp Duty change has left housing unscathed; we look for a 0.5% q/q rise in house prices in Q4.
- House prices, however, will flatline in H1 2022; two-year fixed rate mortgage rates will jump by 60bp in Q4...
- ...The squeeze on households' real income, as inflation rises and taxes increase, also will subdue the market.
- Markets expect interest rates to rise more in the next 15 months than in any other period since 2007.
- Firms are well placed to cope, and the effective interest rate on all mortgage debt would rise only slowly...
- ...But higher new mortgage rates would hit spending via lower house prices or higher mortgage payments.
- Markets still expect the MPC to hike rates in Q2 2022, despite surprise plans to lift national insurance in April.
- The tax hike will defer a full recovery in households' spending to the second half of next year.
- The plans imply the Treasury does not expect the OBR to turn upbeat on the medium-term economic outlook.
The U.K. economy was the G7's straggler for a fifth consecutive quarter, despite the rebound in Q2.
GDP will barely rise in July; June's surges in output in the health and advertising sector will reverse...
...while data from OpenTable and the BRC point to a step down in consumers' spending last month.
Car demand surged in Q2, as easing Covid-19 restrictions boosted consumers' confidence.
But shortages of key components have limited the supply of new cars; used car sales have surged.
Used car sales look set to remain elevated this year, pushing up prices.
By the autumn, vaccination rates no longer will be higher in the U.K. than other advanced economies.
The chances of U.S. and U.K. rates rising in lockstep are remote; the U.S. recovery is far more advanced.
U.K. political risks are low now, but next year investors will start to weigh the risks from the 2024 election.
Covid-19 cases likely will pick up in September, as schools return and building ventilation declines.
Business closures in Q4 aren't likely, but households will remain cautious, delaying a full recovery.
In the event of a new variant and lockdown, we think the MPC would cut rates to -0.25%, despite 4% inflation.
The MPC's forecasts imply markets' expectations for future rate hikes are about right...
...But the risks to the MPC's economic forecasts now are skewed firmly to the downside.
We now expect the first rate hike in Q2 2023, slightly earlier than before, with QE wind-down coming later.
Now that negative rates are in the toolkit, the MPC might divulge its new estimate for the lower bound.
The MPC also might lower the threshold that Bank Rate must reach before it starts to wind down QE.
We expect Ofgem to announce on Friday that the default tariff cap will rise by a painful 13.5% in Q4.
The proportion of staff furloughed fell to 5.7% at the end of June, from 7.5% a month earlier...
...But surveys point to only a marginal fall in early July, and still high usage in fully recovered sectors.
Firms likely won't fully relinquish recent productivity gains; the employment rate will drop back in Q4.
The recovery in the manufacturing sector slowed in July, probably to a complete standstill.
Output should pick up in the autumn, amid easing supply constraints and robust restocking demand...
...But we see little chance of long-term reshoring; Brexit is another barrier to a sustained recovery.
The ONS' Business Impact of Covid-19 survey suggests business turnover has flatlined since late May.
The disruption caused by the "pingdemic" wors- ened in late July, but likely is now starting to fade.
Unemployment still looks set to jump in Q4, despite another hefty drop in furlough scheme usage in June