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- This week's surge in energy prices, if sustained, will boost the CPI by an extra 1.5 percentage points.
- Households' real disposable incomes now are set to fall by about 2.2% this year, the most since WW2.
- Below-trend GDP growth lies ahead, which will obviate the need for much higher interest rates.
- Rising debt interest payments explain why January's surplus was smaller than the OBR forecast.
- We expect the OBR to revise up its forecast for public borrowing in 2022/23 to about £97B, from £83B.
- Mr. Sunak still will meet his fiscal rules, but will preserve his remaining headroom until nearer the next election.
- We have revised up our forecast for CPI inflation again, and now expect it to peak at 7.5% in April.
- The squeeze on real incomes is set to be intense, though savings depletion should support spending.
- We now expect the MPC to hike Bank Rate to 0.75% in March and 1.0% in May, but then to go no further.
- The default tariff energy price cap looks set to rise by 47% in April, pushing up CPI inflation to 6.2%.
- The rise will be larger, if suppliers are immediately compensated for acquiring failed competitors' customers.
- Removing VAT would limit the inflation peak to 6.0%; a supplier loan scheme could have a bigger impact.
- Markets expect the MPC to hike Bank Rate by nearly 100bp next year, the most in one year since 2007.
- Rising mortgage rates likely would subtract just 0.1pp from households' disposable incomes next year...
- ...But house prices would flatline, so 100bp is on the limit of feasibility; Omicron brings downside risks.
- The effective mortgage rate will be just 20bp or so higher at the end of 2022, if markets' Bank Rate view is right.
- The interest rate on bank deposits would rise by more, so households' net interest payments would fall, initially.
- The housing market, however, looks like the weak link; we expect house prices to flatline in H1 2022.