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Bank of England to look through Omicron and hike rates this month

The Bank of England will plough ahead and hike interest rates for the first time three years this month despite concerns the Omicron variant could whack the UK economy, according to City analysts.

Strong booster jab take up and high levels of existing immunity stemming from the successful vaccination programme has put the British economy in a strong position to withstand a fourth wave of coronavirus triggered by the new variant, experts at Goldman Sachs have predicted.

The emergence of the heavily mutated strain of coronavirus last week initially sparked fears over the health of the British economy due to the likelihood of strict restrictions to curb the spread of the disease.

These downbeat assessments cast doubt over whether the Bank would raise interest rates at its next meeting on December 16.

However, under Goldman’s baseline scenario, “the UK economy will hold up relatively well during the fourth wave, given high vaccine take-up and a successful booster programme,” the Wall Street investment banking giant said.

“As a result, we still believe that a 15 basis points BoE hike is more likely than not at the December meeting.”

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Bullish assessments from global health leaders have emerged this week downplaying the severity of the Omicron, potentially pushing members of the Old Lady’s rate setting committee into lifting rates.

The World Health Organisation (WHO) tempered speculation that the existing crop of Covid-19 vaccines could be scuppered by the new variant by signaling there is no evidence the new strain reduces their efficacy.

GlaxoSmithKline also announced today its Covid-19 antiviral treatment is effective against Omicron.

Those upbeat health assessments have been echoed by economists this week, who have stressed the UK economy is in a much better position to function effectively even amid Covid-19 curbs.

A waning impact of the virus on the economy suggests it will be able to stand on its own two feet without ultra-loose monetary policy, paving the way for a rate hike.

Even before the emergence of the variant, the Bank was under intense pressure to hike rates to hose down runaway inflation.

The Old Lady stunned markets last month when it left rates unchanged at a record low 0.1 per cent despite expecting inflation to hit five per cent next spring.

Prices are already 4.2 per cent higher than they were a year ago, the highest rate of increase in nearly a decade, according to the Office for National Statistics.

Goldman also expects the Bank of England to hike again in May next year, taking rates to 0.75 per cent by the end of 2022.


Source: City AM

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City bets on Bank of England rate hike ramp up again after strong jobs figures

City bets on the Bank of England hiking interest rates soon are ramping up once again after fresh jobless data showed the worst effects of the end of the furlough scheme have been largely avoided.

The Old Lady will turn the dial at its next meeting in December due to the labour market looking less fragile, according to economists, experts and analysts.

Thomas Pugh, economist at RSM UK, said today’s jobless figures showed a key “obstacle preventing” the Bank from hiking rates had been “removed”.

“The continued robust recovery in the labour market will reassure those MPC members who were concerned about damage from the ending of the furlough scheme… most MPC members will probably decide that the labour market is now robust enough to withstand an interest rate hike,” he added.

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Officials on Threadneedle Street justified leaving rates unchanged at a record low 0.1 per cent around a fortnight ago due to a lack of visibility over the impact of the end of the furlough scheme on the jobs market.

The Bank is most concerned about wage pressures fuelling medium term inflation expectations, which could trigger even sharper upsurges in price rises if workers demand higher pay and businesses try to pass on swelling costs to consumers.

Data from the Office for National Statistics (ONS) released this morning showed payrolled employees climbed 160,000 over the last month to over 29m in October.

This is the first time the ONS has examined the labour market when the furlough scheme has not been live since the start of the pandemic, indicating the economy may be strong enough to stand on its own two feet and absorb higher borrowing costs.

“Today’s data has made the odds of a rate rise in December more finely balanced,” Martin Beck, senior economic advisor to the EY ITEM Club, predicted.

The Old Lady decided to keep rates dormant despite expecting inflation to hit five per cent in April next year, more than double its target.

Economists expect near term inflation to blow the Bank’s target out of the water, with some thinking it will reach four per cent.

The ONS will verify whether those wagers are accurate when it releases its latest inflation estimates tomorrow.

CPI inflation is already running hot at 3.1 per cent.


Source: City AM

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Budget 2021: Unemployment likely to peak at 5.2%

Chancellor Rishi Sunak revealed during the Budget 2021 that unemployment is expected to peak at 5.2%, according to the Office for Budget Responsibility (OBR).

As a result, Sunak said this will mean: “over two million fewer people will be out of work than previously feared.”

The OBR expects gross domestic product (GDP) to expand by 6.5% this year, compared to the 4% forecast at the Budget 2021 in March.

This is below what the Bank of England has predicted, which is 7.4% of growth.

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UK GDP rose by 5.5% between April and June, compared with the first three months of the year, more than any other country within the G7 group.

Rising inflation has been predicted to reach 3.1% and likely to rise further.

Sunak said this is due to global factors, such as the world opening up after the pandemic and demands for goods increasing.

Addressing Parliament, Sunak said if recovery is strong, the government will be able to return to spending 0.7% of GDP on overseas aid by 2024, and that spending is growing by 3.8% a year in real terms.

By Jake Carter

Source: Mortgage Introducer

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UK recovery perks up despite consumer gloom and inflation surge

UK economy unexpectedly regained momentum in October, despite surging costs and mixed consumer signals, according to surveys on Friday that could tempt the Bank of England to raise interest rates for the first time since the pandemic.

The preliminary “flash” IHS Markit/CIPS Composite Purchasing Managers’ Index rose by the largest amount since May to hit 56.8, up from 54.9 in September. By contrast, a Reuters poll of economists had pointed to a further slowdown to 54.0.

Sterling rose to the day’s high so far against the dollar after the data, which contrasted with earlier figures showing a record fifth straight monthly fall in retail sales in September, despite panic-buying of petrol late in the month.

However, IHS Markit’s chief business economist, Chris Williamson, said the unexpected rebound in the PMI should not be viewed as a green light for the BoE to raise rates on Nov. 4.

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“The service sector is clearly in something of a sweet spot,” he said. “Rising COVID-19 case numbers pose a downside risk to growth in the coming months, potentially deterring some services-oriented activity … and potentially leading to the renewed enforcement of health restrictions as winter draws in.”

Market researchers GfK said households this month were the gloomiest since the last lockdown in February, due to higher prices, shortages in shops and petrol stations and a big increase in the number of coronavirus cases.

Britain reported more than 52,000 new COVID-19 cases on Thursday alone, the highest since a wave of the Delta variant in July and more than anywhere else in Europe.


IHS Markit said the rise in the PMI was driven by Britain’s services firms as consumers and businesses spent more due to the rollback of pandemic restrictions. Travel firms in particular benefited from a relaxation of COVID-19 testing rules.

By contrast, retailers – who are not covered in Britain’s PMI – have seen sales fall non-stop since a record high in April as supply-chain difficulties worsened and spending options widened as pubs, restaurants and hotels reopened.

Service sector activity outpaced manufacturing output by the widest margin since 2009 as factories struggled again with shortages of supplies and staff and recorded barely any growth.

The PMI for the services sector rose to 58.0, its highest in three months, while the manufacturing PMI’s output component sank to its lowest since February at 50.6.

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Higher wages and the worsening supply shortages resulted in the fastest increase in average costs since the combined composite index was launched in January 1998. Separate PMIs for the services and manufacturing sectors showed prices charged by firms rose by the most since these individual series began more than 25 years ago.

With inflation set to hit more than double its 2% target soon, the BoE is expected to raise borrowing costs soon as it tries to make sure that rising inflation expectations do not become embedded in British businesses’ pricing decisions.

The Bank of England’s new chief economist, Huw Pill, said in an interview published late on Thursday that the question of raising interest rates was “live” for the central bank’s November meeting, and that he would not be surprised to see inflation exceed 5% early next year.

The Confederation of British Industry said on Thursday that manufacturers were raising prices by the most since 1980 in the face of some of the biggest increases in costs and labour shortages since the 1970s.

September’s retail sales data showed the biggest increase in prices since December 2011, and GfK said a record proportion of the public expected inflation to accelerate over the next 12 months.

But many economists think the BoE would still do better to wait until Britain’s economy has returned to its pre-pandemic size before raising rates, especially as finance minister Rishi Sunak is expected to set out tighter budget rules next week.

“The risk is that by tightening monetary policy too quickly, some of the temporary economic damage from the pandemic becomes permanent,” said Thomas Pugh, an economist at accountants RSM UK.

By William Schomberg and David Milliken

Source: Reuters

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Bank of England official warns inflation could top 5% as UK economy slows

Inflation could surge above 5% early next year in the United Kingdom, according to the Bank of England’s top economist, as product and labor shortages continue to hamper the country’s economic recovery.

“I would not be shocked — let’s put it that way — if we see an inflation print close to or above 5% [in the months ahead],” Huw Pill told the Financial Times. “And that’s a very uncomfortable place for a central bank with an inflation target of 2% to be.”

Pill declined to reveal how he would vote at the Bank of England’s next meeting on November 4, but he said that the question of whether policymakers should hike interest rates from 0.1% is “live.” Central banks use interest rates to keep inflation low and stable.

Inflation has been running near 3% in the United Kingdom as the country’s economy bounces back from a steep contraction in 2020 caused by the coronavirus pandemic. But there are signs the recovery is faltering, even as inflation remains stubbornly high.

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The latest worrying signal came Friday, when the Office for National Statistics said that retail sales volumes fell for a fifth consecutive month in September. That’s the longest streak of consecutive declines since records began in 1996. Non-retail spending was also weak.
Economists worry that the United Kingdom may be entering a period of “stagflation” characterized by weak economic growth and rising prices.

“The whiff of stagflation is greater in the UK than in most other economies and we now think temporary shortages will restrain GDP for longer and boost inflation by more than we previously thought,” Capital Economics analysts wrote this week.
“This won’t be anywhere near as severe or as persistent as in the 1970s,” the analysts said.
“But for the next six months, the worsening product and labor shortages will put the brakes on the economic recovery at the same time as higher energy prices drive up CPI inflation from 3.2% in August to a peak of around 5.0% in April next year,” they added.

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The United Kingdom is facing severe labor shortages, including a shortfall of 100,000 truck drivers, and workers are demanding higher wages, contributing to inflation. Energy prices have risen sharply across Europe, and some businesses are passing along higher costs to consumers.
British consumer goods giant Unilever (UL) — which sells products around the world — said Thursday that it hiked prices by 4.1% in the quarter to September.
Governor Andrew Bailey said last weekend that the Bank of England would “have to act” in response to surging prices. He said he continues to “believe that higher inflation will be temporary,” but conceded it could last longer than previously thought as a result of energy price hikes.

By Walé Azeez

Source: CNN Business

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Inflation declines in September

Inflation slowed unexpectedly in September as the Bank of England is set to tackle the acceleration by hiking interest rates.

Consumer Prices Index (CPI) rose 3.1 per cent in the year to September, down from 3.2 per cent to August, official data showed.

Increased prices for transport were the largest contributor to price rises, at 0.91 percentage points, according to the Office for National Statistics.

Restaurants and hotels made the largest downward contribution to the change in the inflation rate. This was because the government’s Eat Out to Help Out hospitality meal discount scheme of August 2020 dropped out of the annual comparison.

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The Bank of England said last month that expected inflation to rise slightly above 4 per cent in the last quarter of 2021.

Mike Hardie, head of prices at the ONS, said: “However, this was partially offset by most other categories, including price rises for furniture and household goods and food prices falling more slowly than this time last year.

“The costs of goods produced by factories rose again, with metals and machinery showing a notable price rise. Road freight costs for UK businesses also continued to rise across the summer.”

On a monthly basis, CPI increased 0.3 per cent in September 2021, compared with an increase of 0.4 per cent in September 2020.

Businesses have warned of inflationary pressures with energy prices rocketing in recent weeks.

By Emily Hawkins

Source: City AM

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Bank of England rate-setter: Brace yourself for interest rate rises very soon

One of the key rate-setters on the Bank of England’s Monetary Policy Committee has today said UK households should be primed for an interest rate rise “significantly sooner” than first thought.

Michael Saunders, the former Citigroup economist turned Threadneedle St wonk, noted that financial markets had already priced in a pending rate rise as economies look to dampen inflation.

Saunders told the Sunday Telegraph: “I’m not in favour of using code words or stating our intentions in advance of the meeting too precisely, the decisions get taken at the proper time. But markets have priced in over the last few months an earlier rise in Bank rate than previously and I think that’s appropriate.”.

It’s a fresh sign that the Bank of England may be the first major central bank to raise rates as the world emerges from the Covid-19 pandemic.

Last month the nine-member Monetary Policy Committee voted unanimously to keep rates at the record low of 0.1 per cent.

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But Saunders and Deputy Governor Dave Ramsden voted to halt the BoE’s government bond purchases ahead of schedule.

Saunders said markets had fully priced in a February rate hike by the British central bank and had half priced in a December increase in borrowing costs.

“I’m not trying to give a commentary on exactly which one, but I think it is appropriate that the markets have moved to pricing a significantly earlier path of tightening than they did previously,” he said.

The comments by Saunders came shortly after Bank of England Governor Andrew Bailey said inflation running above the central bank’s two per cent target was concerning and had to be managed to prevent it from becoming permanently embedded.

By Josh Martin

Source: Commercial Finance Network

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UK economy bounced back by more than thought in Q2 before slowdown

UK economy grew by more than previously thought in the April-June period before what looks like a sharp slowdown more recently as post-lockdown bottlenecks, including a shortage of truck drivers, mount.

Gross domestic product increased by 5.5% in the second quarter, the Office for National Statistics said, stronger than its preliminary estimate of growth of 4.8%.

The ONS said the data had been adjusted to take account of more complete data from the health sector as well as an update of its sources and methodology for calculating output.

The revision means Britain is no longer the worst-performing economy among Group of Seven developed countries, when comparing GDP in the summer of 2021 with its level at the end of 2019. It is now tied with Germany and above Italy.

The figures provided a more complete picture of Britain’s swift economic bounce-back from its coronavirus lockdown earlier this year, but there are now signs of a loss of momentum due to shortages of supplies and staff as the global economy reopens.

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“While the upward revisions to GDP are clearly welcome, Q2 was three months ago, and the recovery appears to have stagnated since,” Ruth Gregory, an economist at Capital Economics, said.

“Even so, given that there is now thought to be less spare capacity in the economy that will only encourage the Bank of England to hike rates in the not too distant future.”

On Wednesday, BoE Governor Andrew Bailey said he thought the UK economy would regain its pre-pandemic level of output in early 2022 – a month or two later than the BoE had forecast in August.

Despite the slowdown, the British central bank has signalled that it is moving towards a first interest rate hike since the pandemic as it expects inflation to head above 4%.

Thursday’s data showed households increased their spending by more than 7% in the April-June period and they dipped into their coronavirus lockdown savings to fund it.

The savings ratio, which measures the income households saved as a proportion of their total available disposable income, fell to 11.7% from 18.4% in the first quarter of 2020, the ONS said.

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GDP growth was driven by the services sector, especially in the accommodation and food industry where output rose by 87.6% in quarterly terms as it reopened from lockdown.

Manufacturing output rose by 1.8% in the second quarter, despite a shortage of microchips hurting car production. Food and beverage manufacturing performed strongly.

The ONS said construction output had broadly returned to its pre-pandemic level.

The data also showed that Britain’s current account deficit with the rest of the world held steady at 8.6 billion pounds in the second quarter, equivalent to 1.5% of gross domestic product. In the first quarter, the shortfall was 1.6% of GDP.

Excluding volatile trade in precious metals, the deficit widened to 1.8% of GDP from 0.2% in the first quarter, due to a worsening of Britain’s trade balance and a fall in earnings on foreign investments.

Reporting by William Schomberg and Andy Bruce

Source: Reuters

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Bank of England governor says UK’s economic recovery is slowing

The governor of the Bank of England, Andrew Bailey, has warned UK’s economic recovery from Covid-19 is slowing amid supply chain disruption and staff shortages.

Answering questions from MPs on the commons Treasury committee, Bailey said there was evidence of the recovery “levelling off” despite the easing of pandemic restrictions earlier in the summer.

He said the economic fallout from the disease had “attenuated a lot” over recent months, helping growth to rebound. “But it’s still within the context of this imbalance in demand for goods and services. At the moment we’re seeing some levelling off of the recovery, the short-term indicators are suggesting that,” he said.

The Bank’s governor suggested that Covid disruption to global supply chains, which have upended industries from car making to hospitality, had proved more persistent than expected by Threadneedle Street earlier this year, as higher rates of coronavirus infections and heightened demand for manufactured goods put pressure on shipments.

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He said there had been an expectation that consumer demand for goods would increasingly switch to services as pandemic restrictions were relaxed, but that had so far not happened as much as expected. “There’s this underlying story of imbalanced demand, which we thought would by now have been well on the way to correcting itself,” he said.

Bailey said much of the inflationary pressure caused by the pandemic would eventually fade, adding that current high levels of global commodity prices – such as steel, agricultural goods and oil – were likely to fall because market prices typically tend to revert back to average levels over time. “We expect the bottlenecks to sort themselves out,” he added.

However, he expressed concern about a continued shortage of workers, which could last longer than material shortages and push up inflation. “Others will speak for themselves, but I have a bit more concern about persistence in the labour market story,” he told the committee.

Economists are concerned that shortages of workers and supplies, coupled with red hot demand for goods and services, could fuel persistently high levels of inflation as the UK emerges from the pandemic. Threadneedle Street forecasts inflation will hit 4% this year, before gradually falling back towards its 2% target rate.

Bailey said the Bank’s rate-setting monetary policy committee would probably be forced to raise interest rates from the current level of 0.1% to combat inflationary pressures over the next two to three years.

Lifting the lid on the MPC’s decision making process, he said the committee was evenly split four-four at its August meeting when weighing up whether the economic conditions had been met for raising borrowing costs.

Bailey said he felt the conditions for a rate rise had been met, while deputy governors Dave Ramsden and Ben Broadbent said they agreed. Silvana Tenreyro, an external member of the MPC, said she disagreed.

It comes after Michael Saunders, another external MPC member, said earlier this week that interest rates may needed to rise next year.

The MPC voted unanimously last month to keep interest rates unchanged, while Saunders cast a sole dissenting vote to stop short the Bank’s £895bn quantitative easing bond-buying programme.

By Richard Partington and Julia Kollewe

Source: The Guardian

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Bank of England: Economists Debate the Outlook for Interest Rates

The August monetary policy decision from the Bank of England (BoE) gave companies and households advanced notice that a normalisation of interest rates could be likely over the coming year or so, although as ever there remains a broad plurality of views among analysts and economists on the question of exactly when borrowing costs and savings returns are likely to rise.

This month’s policy decision proved to be a milestone in the UK economy’s journey through the pandemic after the BoE’s announcement revealed that an unknown number of the eight participants in August’s Monetary Policy Committee (MPC) meeting thought the Bank’s minimum economic thresholds for necessitating an interest rate rise had already been met fully during recent months.

“Some members of the Committee judged that, although considerable progress had been made in achieving the conditions of the MPC’s existing policy guidance, the conditions were not yet met fully,” minutes of the MPC’s meeting read.

“The other members of the Committee judged that the conditions of the existing policy guidance had been met fully, as demonstrated by developments in economic data and the latest central projections for spare capacity and CPI inflation in the August Report, but noted that the guidance had made clear that these had only ever been necessary not sufficient conditions for any future tightening in monetary policy,” the minutes later state.

The MPC in the end agreed to leave Bank Rate at 0.10% and to continue as planned with the additional £150BN of government bond purchases announced as a supplement to the £895BN asset purchase target of its quantitative easing programme back in November, but the accompanying guidance made clear that the BoE’s interest rates would likely rise as soon as next year and that they could reach 0.50% before the end of 2023.

Furthermore, and following a months-long discussion, the BoE also set out the preconditions necessary for a steady reversal of its QE programme that would eventually see the £895BN portfolio of government and corporate bonds sold back into the market in a policy step that would also eventually have the effect of lifting borrowing costs and savings returns across the economy.

“The rapid recovery in demand has eroded spare capacity such that the economy is projected to have a margin of excess demand for a period. In the medium term, conditioned on the market path for interest rates, inflation is projected to fall back close to the 2% target, and demand and supply are expected to return broadly to balance,” the BoE’s August Monetary Policy Report says.

Driving the BoE’s decisions was the expectation of a continued strong bounceback by the economy this year and next that is seen encouraging a stubborn return of inflation, which was expected to reach 4% later this year; twice the level of the BoE’s 2% target.

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It’s the inflation target that the BoE is seeking to meet when it makes changes to its policy settings, though inflation is influenced by many factors including overall activity within the economy as well as ‘supply side’ factors like the availability of goods and services.

There’s still plentiful scope for the fortunes of the economy to change over the coming quarters however, as well as ample room for the inflation picture to materialise differently to how it was envisaged in August’s meeting, which is a big part of the reason why analysts and economists still have a plurality of views about the outlook for the BoE’s interest rates and quantitative easing programme.

Some of these views are detailed below.

Shahab Jalinoos, head of FX strategy, Credit Suisse

“Last week’s BoE decision to map out its intentions around the sequencing of rate hikes and QE withdrawal reminded markets that the UK economy likely warrants quicker monetary tightening than most in G10.”

“The idea of persistent rate hikes that emerged again in the US in the past week was not mirrored in the UK…In our view, this conservatism in terms of UK rates pricing is the weak link that could yet be challenged by data in coming months.”

“If employment numbers in the Autumn are robust enough to suggest the end of the job furlough scheme in September will not lead to a jump in unemployment. Or if signs of post-Brexit / pandemic labour shortages deepen further and suggest persistent wage pressure is possible, we can imagine a scenario where by Q4, the market makes a meaningful attempt to re-price higher.”

Valentin Marinov, head of FX strategy, Credit Agricole CIB

“The resilience of the pound contrasts sharply with the underperformance of other European G10 currencies and, in particular, the EUR.”

“One recent reason for the recent decoupling between the GBP and the rest of the European G10 currencies has been the outcome of the BoE August policy meeting.”

“We doubt that the meeting was a hawkish game changer for the GBP, however, with the BoE likely to embark on a very gradual policy rate normalisation rather than a tightening cycle.”

“The BoE still doesn’t see any significant risk of runaway inflation in part because there was a limited scope for overheating of the UK economy beyond 2022. In all, we think that the BoE should remain hesitant to join the camp of the hawkish G10 central banks.”

Philip Shaw, chief UK economist, Investec

“After last week’s news, we have amended our view. We still envisage a Bank rate hike to 0.25% from 0.10% to take place in May 2022. However we now also expect a subsequent increase to 0.50% in Q4 2022. In tandem with the MPC’s guidance, we expect the BoE to cease reinvesting maturing gilts from 2023, facilitating a decline in its stock of assets…We expect outright gilt sales to begin in early-2024 (i.e. once the Bank rate is 1.0%).”

“At the same time, we are pencilling in two further increases in the Bank rate to 1.0% by end-2023.”

“Of course it is impossible to forecast the pace with any degree of confidence at all. However our working assumption is that the BoE will sell £20bn of gilts through the course of 2024 and 2025, in addition to the £130bn (currently) set to mature over those two years, shrinking the balance sheet by a further £150bn, effectively unwinding the additional QE supplied over the course of 2021.”

James Smith, developed markets economist, ING Group

“The Bank of England is no longer forecasting any real increase in UK unemployment later this year, even as wage support comes to an end. We think this may prove optimistic, and instead we think we could see an increase in the jobless rate to around 5.5% – though clearly this is still much lower than predictions made only a few months ago.”

“Taken together with the fact that inflation is likely to be much less exciting after a peak of around 3.5-4% later this year, a rise in unemployment would suggest the Bank of England is unlikely to rush into tightening in 2022. For now we’re pencilling in a rate hike in early 2023.”

Stephen Gallo, European head of FX strategy, BMO Capital Markets

“The current pricing of the sterling OIS curve has the first full 15bps rate hike baked into it by June (Figure 2). Assuming Q3 shapes up to be a strong growth quarter, and there is no harsh reimposition of restrictions during autumn and winter months, we don’t see why that 15bps can’t be pulled forward, especially since the BoE has scope to argue that the return to a 25bps setting is not a ‘tightening move’.”

“Although the BoE believes a significant overshoot of the 2.0% CPI inflation target will be temporary, there is probably at least some acknowledgement within the MPC that the factors which severely held down inflation pressure immediately after the GFC are now working in reverse or gaining in intensity (namely: globalization, capacity constraints, bank lending, fiscal policy, and currency debasement).”

Michael Cahill, G10 FX strategist, Goldman Sachs

“The Bank of England’s updated outlook and exit guidance essentially aligned with the market’s view that the time for liftoff has been pulled forward, but the likely glide path will be relatively shallow.”

“Our economists maintain a much later liftoff (Q3 2023) than current market pricing, because they think there is more slack in the economy, which should translate into softer labor market and inflation data through year-end than expected by the BoE.”

“Given the BoE’s refreshed guidance on exit sequencing, as well as our slightly-revised Bank Rate forecast, we are upgrading our 3m and 6m EUR/GBP forecasts to 0.85 [GBP/EUR: 1.1764]; we expect the currency to be particularly sensitive to incoming data on inflation and the labor market as the furlough scheme expires, with a smaller revision to our 12m forecast to 0.87 [GBP/EUR: 1.1494] (vs aflat 0.88 path previously).”

“In revising their Bank Rate forecast our economists noted that risks are skewed toward earlier hiking, which also implies that risks are for a lower path for EUR/GBP than in our updated projections.”

Paul Dales, chief UK economist, Capital Economics

“We think tightening will start later than the markets expect, perhaps in August 2023. And we will be keeping an eagle eye on the labour market and wage data to see if our assessment is looking good or a bit skew-whiff.”

“The financial markets are fully pricing in a hike in Bank Rate from 0.10% to 0.25% by this time next year. The Bank’s inflation forecasts loosely suggest that might be a bit too soon.”

“In response to the Bank confirming how it will tighten policy, we now think Bank Rate will be raised a bit earlier and QT will start a bit later. Our new forecasts envisage Bank Rate rising from 0.10% to 0.25% in August 2023, to 0.50% in February 2024 and QT beginning in February 2024.”

Andrew Goodwin, chief UK economist, Oxford Economics

“While there was greater clarity on the strategy for future tightening of monetary policy, the potential timing was little clearer. The tone of the minutes was more hawkish, but the shift was subtle, and we think the MPC is still some way from starting active discussions about the need to tighten policy.”

“The £150bn programme of gilt purchases, which was set in train last November, is now very unlikely to be stopped before its planned finish at the end of the year. At the August meeting, only Michael Saunders voted to curtail it sooner. And with only two more opportunities to cut it short, the MPC’s forecasts appeared to set the bar high for a change of heart.”

Kallum Pickering, UK economist, Berenberg

“After ending asset purchases in December, we continue to expect the first-rate hike to come in August 2022 (15bps). Today’s meeting suggests the risk to this call are for a rate hike somewhat sooner than we project. If, as we expect, the BoE hikes the bank rate to 0.5% by end 2022 (following a 25bps hike in December), the newly outlined exit strategy opens the door for the start of a passive balance sheet reduction beginning in 2023.”

“While the voting pattern of the August meeting surprised a little to the dovish side, the overall meeting outcome and guidance is in line with the base case outlined in our preview – that we expect the BoE to begin to normalise its policy by the end of the year.”

Samuel Tombs, chief UK economist, Pantheon Macroeconomics

“We are bringing forward our expectation for the increase in Bank Rate to 0.25% to Q2 2023, from H2 2023 previously. We then expect Bank Rate to rise to 0.50% in Q1 2024 and for the MPC to stop QE reinvestment then too.”

“We think that CPI inflation will return to the 2% target in Q4 2022, four quarters earlier than the BoE expects.”

“In particular, we think that supply chain issues and strong pandemic-related demand for goods will have eased by early next year, causing core goods inflation to undershoot its long-run average.”

“We think that sterling will depreciate against the dollar to $1.35 over the coming months, from $1.38, as it becomes clear the U.S. Fed will raise interest rates sooner and further than the U.K. MPC, and then will remain at this level in 2022, as political risks start to be considered by investors again.”

“We expect a smaller depreciation against the euro to €1.17, given the likelihood that Eurozone interest rates remain stuck at the floor over the next two years.”

Written by James Skinner

Source: Pound Sterling Live

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