BoE brings forward UK recession projections
|Going into this meeting it was always going to be about the growth forecast from the BoE. That turned out to be the case as the BoE revised inflation projections at the same time as bringing forward recession projections for the UK. Inflation is going to be higher and growth is slowing faster. Stagflation is biting in the UK and this should weaken the GBP medium term.
The decision
The decision was 8-1 with the majority in favour of the 50bps hike. The one dissenter Tenreyro favoured a smaller 25 bps hike. However, the majority decision was carried and the rate rose to 1.75% from 1.25%. This was the biggest increase in rates in 27 years and the BoE reminded markets it is prepared to act ‘forcefully’ if necessary to bring in inflation.
Inflation
In May the BoE forecast inflation to rise to 9.4%. That has now been revised higher to 13% in 2022 Q4. The BoE projects inflation to stay at ‘much higher levels’ throughout much of 2023 before falling to the 2% target in two years’ time. The BoE projects firms will increase their selling prices markedly reflecting the sharp rise in their labour, fuel, and material costs.
Uncertainty for the BoE
The BoE recognise that the risks around their projections are ‘exceptionally large’. They go on to say that, ‘there is a range of plausible paths for the economy, which have CPI inflation and medium-term activity significantly higher or lower than in the baseline projections in the August Monetary Policy Report’. It is also mainly due to the energy crisis with UK income hitting far worse than the energy crisis from the 1970s. This means that the GBP will be very sensitive to incoming data as the BoE state that they are not on a ‘pre-set’ path.
Growth revised lower
The UK is projected to now fall into a recession in Q4 of this year. That recession is due to last 6 quarters. Real household post-tax income is projected to fall sharply in 2022 and 2023, furthermore, consumption growth turns negative. Unemployment is also set to rise in 2023, but not by much. Here are the updated GDP forecasts:
-
2022 GDP: 3.5% (May forecast 3.75%).
-
2023 GDP -1.5% (May forecast -0.25%).
-
2024 GDP -0.25% (May forecast +0.25%).
The Takeaway
After the Fed and the RBA moved to a meeting-by-meeting, data-dependent basis, so too has the BoE. This means that economic data is going to be moving markets far more again. Secondly, this latest BoE meeting should provide a buy on dips bias for the EURGBP.
Learn more about HYCM
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.