Pushpin Singh, economist at the Centre for Economics and Business Research, predicts UK interest rates will rise in the second quarter of next year.
Singh also warns that inflation pressures are likely to continue into 2022, with the current spike in gas prices adding to price pressures.
Bank staff projections for growth in the third quarter were revised down to 2.1% quarter-on-quarter, down from the 2.9% quarterly growth at the time of the August MPC Report, with the Bank citing an “emergence of some supply constraints on output ”.
Meanwhile, the Bank of England expect CPI inflation to rise temporarily, to slightly above 4.0% in the fourth quarter. However, we believe that some of the factors driving inflation at the moment may well extend into the first months of 2022. Consequently, Cebr expects the Bank to start raising interest rates in the second quarter of 2022 in order to bring inflation back to the 2% target.
“Uncertainty around the outlook” for the UK labour market has increased, as the end of the furlough scheme approaches, the Bank of England warns.
The minutes of its MPC meeting say:
Key questions included how the economy would adjust to the closure of the furlough scheme at the end of September; the extent, impact and duration of any change in unemployment; as well as the degree and persistence of any difficulties in matching available jobs with workers.
The Committee also spent some time discussing the “surprisingly high number of jobs” still recorded as being furloughed — around 1.7m in July — even though vacancies are at record highs.
One possibility was that some companies are using the CJRS (Coronavirus Job Retention Scheme) to “hoard labour” ahead of an expected recovery in demand. But, the cost of that strategy increased in July when firms started paying a share of furloughed staff wages.
Another is that furloughed workers took second jobs with alternative employers, or worked more hours with existing second jobs, which is allowed under the CJRS. However, that doesn’t really square with high vacancy rates…
The MPC considered another hypothesis: shifts in the pattern of demand during the pandemic mean those on furlough were not suitable matches for the job vacancies currently available.
And that, the Bank warns, means any increase in unemployment following the end of the CJRS might, at least in part, be “more structural than cyclical”.
[A report this week found that Britain’s worst labour market shortages in decades are being driven by employers struggling to recruit low-paid workers].
Pound jumps on expectations of earlier rate rise
The pound has jumped, as the City anticipates that the Bank could rise interest rates sooner than previously thought to tackle inflation.
Sterling has gained almost a cent against the US dollar to $1.3715, as investors and traders predict an earlier rise in borrowing costs – possibly as soon as March 2022.
Oliver Blackbourn, multi-asset portfolio manager at Janus Henderson Investors, said deputy governor Dave Ramsden has turned more hawkish, by voting to end QE bond-buying early:
As was widely expected, the Bank of England maintained its current policy stance. Dave Ramsden joined Michael Saunders in voting against completing the scheduled set of asset purchases, a somewhat symbolic move given previous communications and the limited time left to run anyway.
However, it does signify his increasingly hawkish stance on monetary policy, an important sign as markets focus on the potential for an interest rate increase in the first half of 2022. Markets are now pricing lift off in March and two hikes by the end of next year. The focus will now switch to the November meeting when a new set of forecasts will be made available.
Bloomberg: Traders bet on a Bank of England rate hike to 0.25% in March
City traders have brought forward their forecast for the first UK interest rate rise since the pandemic, Bloomberg reports:
Traders brought forward wagers on a Bank of England rate hike to 0.25% after officials said developments since its August meeting appear to have strengthened the case for modest tightening.
Money markets now see a 15-basis-point increase in March 2022, having priced it for May before Thursday’s meeting. They still see a further quarter-of-a-percentage-point rise to 0.5% in November 2022. Two BOE officials dissented to vote for a reduction in bond purchases.
BoE: Case for tightening policy has strengthened
The Bank of England says that recent price developments “appear to have strengthened” the case for a modest tightening of monetary policy over the forecast period (something it flagged back in August).
Consumer price inflation jumped to 3.2% last month, a record monthly rise from 2%, and the highest level since March 2012.
The Bank blames ‘base effects’ for the majority of that surge (a year ago, food and drink prices fell due to the Eat Out to Help Out scheme).
It also points to global cost pressures, and supply bottlenecks, driving up UK consumer goods prices.
And it still expects CPI inflation to fall back to close to the 2% target in the medium term, “conditioned on the market path for interest rates” (ie, if the Bank raises interest rates as the City expects).
But, the Bank also acknowledges that people expect higher inflation:
Indicators of households’ medium-term inflation expectations have increased in recent months, with the Citi/YouGov five-to-ten year ahead measure at its highest level since 2013 in September.
Bank lowers Q3 growth forecasts
The Bank of England has also lowered its growth forecasts for the UK economy, warning that supply chain problems are hitting output (as this morning’s PMI survey showed).
Bank staff have revised down their expectations for the growth in the third quarter of this year, from 2.9% to 2.1%.
That would leave the level of Q3 GDP around 2½% below its pre-Covid level.
The Bank warns that supply constraints are hurting growth – from a lack of raw materials to staff shortages.
These have been evident in surveys showing historically lengthy supplier delivery times and backlogs of work, significant material and labour shortages in a number of sectors, and lower than normal levels of inventories.
Momentum appears to have picked up in services-orientated sectors where output remains well below pre-Covid levels. Although official estimates of retail sales have weakened somewhat, other indicators of spending have generally remained at strong levels, as has consumer confidence.
The Bank also warns the pace of the world’s economic recovery also shows signs of slowing, with global inflationary pressures still strong, and signs that cost pressures may prove more persistent.
BoE: Energy price surge will push inflation over 4%
The Bank of England has warned that inflation will rise above 4% by the end of this year, due to the energy price shock.
The Bank says the surge in gas prices are an ‘upside risk’ to its inflation projections in August (when it saw inflation hitting 4% by the end of the year).
The Monetary Policy Committee also warn that inflation could remain above 4% into the second quarter of next year — which would intensify the cost of living squeeze facing UK households.
The minutes of this month’s monetary policy committee meeting say:
CPI inflation was expected to rise further in the near term, to slightly above 4% in 2021 Q4, owing largely to developments in energy and goods prices.
The material rise in spot and forward wholesale gas prices since the August Report represented an upside risk to the MPC’s inflation projection from April 2022, and meant that CPI inflation could remain above 4% into 2022 Q2, all else equal.
Most other indicators of cost pressures had remained elevated. The Committee’s central expectation continued to be that current elevated global cost pressures would prove transitory. Indeed, there were still good reasons to expect material supply responses in commodity and other global markets, pushing down on future input prices and import costs.
The Bank also suggests that it expects the energy price cap to rise again when it is reviewed next year:
Spot and forward wholesale gas prices had risen materially since the publication of the August Report, against a backdrop of strong demand and some supply disruption.
This could represent a significant upside risk to the MPC’s inflation projection from April 2022, when Ofgem next updated its retail energy price caps based on the relevant forward contracts, and meant that CPI inflation would remain slightly into 4% until 2022 Q2, all else equal.
Bank of England leaves interest rates on hold, split over QE widens
Bank of England has left UK interest rates on hold at record lows, but there’s a split over its stimulus package.
The Monetary Policy Committee voted 9-0 to leave Bank rate at just 0.1% at this week’s meeting. The MPC also voted to maintain its quantitative easing bond-buying programme at £895bn.
BUT two policymakers, deputy governor Dave Ramsden and external member Michael Saunders, voted against this proposition.
They wanted to stop QE early, by reducing the amount of UK government bonds the Bank buys, from £875bn to £840bn.
Back in August, Saunders was the only policymaker who wanted to end QE early.
People living in the north will be hit hardest by soaring energy prices this winter, Business secretary Kwasi Kwarteng has acknowledged.
Labour MP Rachael Maskell (who represents York Central) told the Commons:
“The rise in energy prices will disproportionately impact people living in the north because it is colder during the winter in the north.
So what assessment has he made of the regional disparities and how is he going to mitigate against that?”
“I think the honourable lady raises a very fair point and clearly, in terms of the gas price, the single most important determinant of it is the weather, and she’s absolutely right.
“That’s why we’ve got schemes like the Warm Home Discount and that’s why we’re absolutely focused on protecting the most vulnerable customers, wherever they are in the UK.”
Energy analysts are concerned that a particularly cold Northern Hemisphere winter could drive gas prices higher.
Bloomberg reports that Citigroup Inc has more than doubled its Asian and European natural gas price forecasts for the next quarter….
“Global natural gas prices could continue to go parabolic in the coming weeks and months,” Citi analysts said in the note.
“Strong demand and a lack of supply response have sharply tightened the market. Any surprise demand surge or supply disruptions could propel price further upward.”
Over in parliament, business secretary Kwasi Kwarteng has denied that Britain has been complacent over the energy market, following the collapse of several suppliers.
Ed Miliband, the shadow business secretary, accused Kwarteng of being complacent, in an an urgent question on the energy crisis.
He says that Kwarteng was warned 18 months ago, when he was energy minister, that there was systematic risk to the energy supply sector.
Kwarteng told MPs that:
We haven’t been complacent, the whole point about the supplier of last resort process, which was interrogated last year, is that it’s an organised process, well established, which can allow existing strong companies to absorb our customers in failure.
Kwarteng also sticks to his position that energy suppliers won’t be bailed out (just days after agreeing to pay millions of pounds to US fertiliser firm CF Industries to restart CO2 production.)
“Government will not be bailing out failed energy companies.”
Stagflation fears as UK company growth hits seven-month low
Growth across UK companies has fallen to a seven-month low in September, as rising costs lead companies to hike prices at a record pace.
Data firm IHS Markit reports that the UK private sector is losing momentum as it enters the autumn, increasing the risk of stagflation.
Growth in output and new orders so far this month are the weakest since February (just before lockdown restrictions were eased), according to its latest poll of purchasing managers.
And while growth slowed, inflationary pressures showed little sign of abating, due to severe supply-chain disruption, raw material prices and increased transportation costs — with Brexit being cited as a factor by many companies.
Some firms also reported rising wages, as they lift pay to try to attract workers.
In response, companies raised their own selling prices at the strongest pace on record, which could push up prices in the shops.
Employment growth slowed sharply at manufacturers — with some struggling to find suitable staff and others looking to reduce workforce numbers due to softer demand (a worrying development).
Services firms kept hiring at a strong pace, though.
This pulled Markit’s Flash UK Composite Output Index, which measures growth, down to 54.1, a seven-month low, from August’s 54.8.
Chris Williamson, chief business economist at IHS Markit, says the data will add to worries that the UK economy is “heading towards a bout of ‘stagflation’” – as growth slows and price surge ever higher.
While there are clear signs that demand is cooling since peaking in the second quarter, the survey also points to business activity being increasingly constrained by shortages of materials and labour, most notably in the manufacturing sector but also in some services firms. A lack of staff and components were especially widely cited as causing falls in output within the food, drink and vehicle manufacturing sectors.
“Shortages are meanwhile driving up prices at unprecedented rates as firms pass on higher supplier charges and increases in staff pay. Brexit was often cited as having exacerbated global pandemic-related supply and labour market constraints, as well as often being blamed on lost export sales.
Business expectations for the year ahead are meanwhile down to their lowest since January, with concerns over both supply and demand amid the ongoing pandemic casting a shadow over prospects for the economy as we move into the autumn.”
There’s some encouraging news on the UK energy front — the wind has picked up, meaning renewable energy is making a bigger contribution to the mix again:
Low wind speeds were one factor behind the surge in UK gas prices, so this could help stabilise the situation, and cut reliance on fossil fuels.
But, the oil price has jumped to a two-month high this morning, with Brent crude hitting $76.53 per barrel for the first time since mid-July. Tight supplies (partly due to hurricanes in the Gulf of Mexico), and a drop in US oil inventories are factors.
There’s also talk that surging natural gas prices could lead to more oil being burned instead.
ANZ Research analysts wrote:
“Supply shortage of gas could encourage power utilities to shift from gas to oil if winter turns out to be colder this year.”
UK consumers spent less on their payment cards last week, in another sign that the economy has lost momentum and some households are squeezed.
In the week to 16 September, credit and debit card purchases fell 2 percentage points from the previous week, to 93% of its February 2020 average.
The ONS reports that spending on staple items (such as food and utilities) fell by 4 percentage points, with work-related spending down 2pp, and ‘delayable spending’ and social spending down 1pp.
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