UK interest rates: lifting off in February: Economic commentary from HSBC
28 September 2022
Key points
The UK’s annual rate of consumer price inflation is heading towards 4%, the first time it has hit this level in a decade.
Rising prices are partly due to supply constraints, especially in the labour market, as economic activity recovers from pandemic-induced lockdowns. Matters won’t be helped by the surge in wholesale gas and electricity prices, caused by a Europe-wide shortage of natural gas, which will eventually feed through into higher prices for households and businesses.
In the light of these developments, HSBC has revised its interest rate forecasts, with the first
rate rise now expected in February next year. With further rises next August and in February
2023, UK Bank Rate is expected to return to its pre-pandemic level of 0.75% in early 2023.
At some point within the next few months, it’s likely that the UK’s annual rate of consumer price
inflation will hit 4%, the first time it has done so since January 2011. Debate rumbles on about
how much of the present price spike will be temporary, but developments in the UK labour market,
coupled with the sudden crisis in energy markets, suggest that higher inflation could be stickier
than many forecasters had previously assumed. To be clear, nobody is anticipating a return
to the days of double-digit inflation rates, which were such a scourge of economic life during the
1970s and 1980s: but a return to the low rates that prevailed in the run-up to the pandemic looks
to be at least a few years off, with obvious implications for the path of interest rates.
To begin with recent statistical releases, the Office for National Statistics (ONS) reported on
14 September that the number of vacancies had topped one million for the first time since this
data has been collected. Moreover, the number of people on PAYE payrolls has now returned
to its pre-pandemic level, having increased by 241,000 in August alone. On the following day,
the ONS reported that the annual rate of consumer price inflation had leapt to 3.2% in August
from July’s reading of just 2.0%. This was the biggest one-month jump in the headline CPI rate
since at least 1997 when the current series began; it was well above the expectations of analysts,
and means that CPI inflation is now at its highest since 2012. Meanwhile, the old-fashioned RPI
measure (not much used these days, although still stipulated in some contracts) climbed to 4.8%.
To read the full report, click here.