abrdn: UK inflation figures remain alarming

abrdn: UK inflation figures remain alarming

January 30, 2023

Inflation UK
Britse Parlement.jpg

Luke Bartholomew, Senior Economist at abrdn, comments on the forthcoming Bank of England meeting.

We expect the Bank of England to increase interest rates by a further 50bps to 4% this week. The Committee is likely to be quite divided on the decision, with several policy makers expected to argue for a slowing down the pace of rate increases. But given current market pricing, it would be a significant shock if the Bank does decide to slow down. Instead, the more interesting thing for investors will be what the Bank says about the possibility of further rate increases.  

There has been an upswing in optimism recently about the possibility of the UK economy having avoided a recession in the second half of 2022. However, it would be a mistake to confuse technical matters around the precise timing of the recession, without a more thorough re-assessment about the underlying health of the economy. On that score, the fundamentals of the economy remain extremely weak, with the UK likely to experience recession-like conditions for much of the year. This would normally argue for bringing the monetary tightening cycle to an end in the very near future.

However, data on inflation has been more concerning. While the headline inflation rate is now well past its peak, and is likely to fall quite rapidly this year, recent wage data means there is little evidence that inflation is now on a sustainable path back to the Bank’s target. This is likely to keep the Bank tightening policy into Q2 this year even as the broader economy weakens significantly.

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