UK cost-of-living crisis set to peak later this year, BoE to continue raising rates: Reuters poll

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LONDON, May 18 (Reuters) – Britain’s worst cost-of-living crisis in three decades will not peak until later this year, but the Bank of England will hike interest rates more aggressively than thought as it battles rising inflation. found a Reuters poll.

Renewed coronavirus lockdowns in China and Russia’s invasion of Ukraine have exacerbated supply chain problems just recovering from the devastation wrought by the pandemic, sending global prices soaring.

Brits face additional headaches from rising energy prices, higher taxes and the ongoing impact of leaving the European Union.

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“Previous inflationary bouts we’ve had have been mostly focused on single items like gasoline that you could try and avoid,” said Paul Dales of Capital Economics.

“But right now it’s so widespread and also focused on things that we can’t avoid like electricity, gas, groceries.”

When asked when the cost-of-living crisis would peak, seven out of 13 respondents to an additional question in the May 12-17 survey indicated the fourth quarter. Three said next quarter and three said by the end of next month.

The government has come under increasing pressure to support household incomes, and when asked another question, nine in 12 respondents said it should do more now. All of these supports should be targeted at low-income households.

Prime Minister Boris Johnson said last week his government would “do things” in the short term to help Brits, but did not go into details. Continue reading

Official data out later on Wednesday is expected to show that inflation hit a 40-year high of 9.1% last month – more than four times the BoE’s 2% target.

Respondents to the survey saw little easing, with average inflation averaging 8.3% in the next quarter versus 8.7 in the current quarter, up from 7.9% and 8.4% in the April survey.

Bank Governor Andrew Bailey said Monday the current surge in inflation is the central bank’s biggest challenge since independence in 1997, and rising food prices are a major concern. Continue reading

Earlier this month the bank said inflation could top 10% later this year. Fuel bills rose 54% in April and the BoE now sees another 40% rise in October. Continue reading

Reuters Poll – Outlook for the UK economy and monetary policy

“Looking ahead over the coming months, the path to double-digit inflation is still firmer, with services and food inflation still picking up. But we need a few more hits — or more price pressures in the pipeline — to get there,” said Deutsche Bank’s Sanjay Raja.

However, in the latest Reuters poll, last month’s elevated medians still suggested inflation would start to ease from here, but wouldn’t reach the target before the end of next year.

In December, the BoE became the first major central bank to raise borrowing costs, raising interest rates at regular intervals from a record low of 0.10% to 1.00%.

Medians in the survey showed a renewed rise to 1.25% in June and 1.50% in the next quarter, before pausing before a rise to 1.75% in the second quarter of 2023.

In an April survey, it wasn’t expected to hit 1.25% by the next quarter and 1.50% by early 2023.

While just over two-thirds of respondents had a 1.25% forecast for the end of the second quarter, they were more divided on where interest rates would be by the end of December. Fifteen saw it below 1.50%, 22 saw it at that level, while 19 expected it higher – with the highest forecasts at 2.25%.

The bank has warned the UK could face a recession, and economists, responding to an additional question, said the probability of a recession within a year averages 35%. That was slightly more than the 30% reported for the euro zone in a separate Reuters poll.

No respondent had two consecutive quarters of contraction in their forecasts, the technical definition of a recession. But quarterly forecasts for this year have been revised downwards and recession probabilities have fluctuated in a wide range of 15% to 100%.

The economy will grow 3.7% on average in 2022 and then expand 1.3% next year, median forecasts from nearly 70 economists showed, up from 3.8% and 1.7% last month.

(For other stories from Reuters Global Business Survey:)

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Reporting by Jonathan Cable; Survey by Indradip Ghosh and Aditi Verma; Edited by Kirsten Donovan

Our standards: The Thomson Reuters Trust Principles.

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