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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.
House purchase demand is falling quickly in response to the jump in mortgage rates and drop in real incomes.
New mortgage rates look set to rise further in Q3, greatly weighing on approvals.
A contraction in supply, however, will prevent a slump in prices; we still forecast a modest 2% decline in H2 2022.
We have revised up our forecast for Q4 CPI inflation by 1.0pp since early July; energy prices have surged again.
But we have revised down our forecast for the level of GDP by only 0.5pp in Q4; fiscal policy will respond.
People also have shown more willingness to deplete savings; we still expect a recession to be narrowly avoided.
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.
PMI data for July show that the recovery in GDP has nearly ground to a halt and inventory is piling up.
Employment growth slowed to a 15-month low, while the pace of input and output price rises eased materially.
On balance, the latest data imply the MPC won't act "forcefully"; market pricing for August is still too high.
The tax cut plans of Tory leadership contenders should be treated with a pinch of salt, given past experience.
Tax cuts won't lift GDP, if they are financed partially by spending reductions; the latter have a higher multiplier.
We doubt that even Ms. Truss would take away the BoE's independence.
Business investment fell in Q1, partly due to supply disruption preventing orders being fulfilled.
But supply shortages are easing, and with Brexit and Covid uncertainty dissipating, capex should rebound.
A renewed rebound in business investment will support GDP growth in the second half of the year.
The MPC and consensus still aren't downbeat enough on Q2 GDP; we look for a 0.7% quarter-on-quarter drop.
CPI inflation now looks set to approach 11% in October, driven by further huge rises in food and energy prices...
...But wage growth and inflation expectations haven’t risen, while producer price inflation now is set to plunge.
CPI inflation in May was 1pp higher in the U.K. than in theEurozone; Brexit hasn’t helped but isn’t the main cause.
U.K. core goods prices were depressed more by lock- downs; base effects will lower the U.K.’s rate soon.
The relative strength of U.K. services inflation is due to VAT hikes and a rise in course costs for E.U. students.
Mortgage rates have surged in recent months, but still have a lot further to rise over the summer.
Monthly mortgage payments for the average borrower will be £300 higher in July than at the end of 2021.
Prices will be supported by the solid labour market and savings, but the hit from higher rates will dominate.
OIS rates do not accurately reflect investors’ expectations for Bank Rate; a sub-2% peak wouldn’t be a shock.
The outlook for sterling is more closely tied to overall risk sentiment in markets than the outlook for U.K. rates.
Our call that rates will top out at 1.75% assumes positive supply-side developments which will boost risk appetite.
April's fall in GDP was driven by Covid spending, but flat private sector GDP caused the downside surprise.
Consumer services firms likely increasingly struggled during Q2, as households' real incomes fell further.
June's extra bank holiday also will dampen Q2 GDP; the MPC has to lower its forecast for 0.1% q/q growth.
The MPC was clear last month; no more than two 25bp rate hikes would be needed to tame inflation.
Since then, activity indicators have weakened and medium-term inflation expectations have stayed low.
A majority will vote again to hike by 25bp, and investors will be left revising the odds of 50bp in August.
Households still were unwilling to use their excess savings in April, despite the sharp drop in real incomes.
With excess savings equal to £186B and consumer credit £23B below its peak, consumers still can spend.
But low confidence, the unequal distribution of savings and falling incomes suggests expenditure will dip in Q2.
Year-over-year growth in the official measure of house prices fell to 9.8% in March, from 11.3% in February.
Surging mortgage rates and falling real disposable incomes will cause house price growth to slow further.
We expect house prices to level off in H2, leaving the year-over-year rate at around 5% at the end of 2022.
Monthly payments will jump by about £100 for most households who refinance mortgages this year.
Mortgage approvals will fall sharply in the second half of this year in response to higher rates.
But house prices likely will stabilise, not fall; the supply of homes coming to the market will contract too.
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