- CPI inflation likely fell to 10.3% in December, from 10.7% in November, a hefty 0.6pp below the MPC’s forecast.
- Motor fuel prices plunged in December, while flash Eurozone data point to a further slowing in food price rises.
- Evidence is mixed on core goods price momentum, but the usual surge in airfares won’t lift the services CPI much.
Samuel Tombs (UK Economist)U.K.
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 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.
- September’s data showed no let up in the rate of core price rises; the MPC will continue to hike rates quickly.
- Core CPI inflation, however, will ease soon; firms have too much stock, and demand is about to plunge.
- The outlook for energy CPI inflation is unclear again, but rising unemployment will let the MPC focus on the core.
Samuel Tombs (UK Economist)U.K.
- We’ll need to raise our forecast for CPI inflation in Q2 2023 by 5pp, if Ofgem’s unsubsidised price cap returns.
- One option for the government is to maintain grants for low income households; these wouldn’t lower the CPI.
- The MPC will worry more about demand than inflation expectations; unemployment will have risen by April.
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.
- The supply of existing homes on the market needs to rise sharply to depress house prices substantially...
- ...But the link between unemployment and forced sales has loosened, as fewer low-to-mid earners own homes.
- We look for a 5% drop in house prices over the next 12 months, but a severe decline in housing transactions.
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.
- 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.
- Employment has stopped rising, but labour market slack hasn't accumulated, due to increasing inactivity.
- We expect labour demand to remain flat but the workforce to grow, as immigration and participation recover.
- For now, wage growth is too hot for the MPC, but building slack and falling CPI inflation will slow it in 2023.
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.
