Next Thursday, September 22nd, the monetary policy committee known as the MPC will meet and decide the interest rate for the British pound (GBP). The belated meeting will be held one week after the country’s mourning for the death of Queen Elizabeth in correspondence to challenging economic conditions like its peer economies. The bank of England – BoE is expected to raise its interest rate, the seventh interest hike since December 2021 when the base rate was 0.1%. Theoretically, the purpose of increasing interest rates is to offset inflation by dragging down consumer spending demonstrated by the consumer price index CPI.
The BoE forecasted the CPI to peak at 13% in the last quarter of 2022 while economists from Citigroup and Goldman Sachs estimated inflation would eventually reach a peak of 18% or even 20% with the need for the BoE to raise the interest rate near 7% soon reacting to soaring energy prices. the annual energy tariff increase by Energy regulator Ofgem was 1,971 British pounds compared to 1,278 following a surge in natural gas prices after Russia’s invasion to Ukraine.
Liz Truss the newly elected prime minister capped energy bills at 2,500 for two years which is below the forecasted October 2022 and January 2023 price caps of 3,549 and 4,567 respectively as forecasted by Citi Group. Core CPI witnessed a steeper upward rally since September 2021 from its 3.10% till August this year recording 6.3%, notably as well it is the highest since April 2011 4.5%. lately, energy prices are contributing the highest share of the headline CPI however, both Core and headline CPI were marathoning since February 2021, one year after Brexit.
As stated by the office of national statistics, retail sales fell by 1.6% in August 2022 continuing a broad downtrend since the summer of 2021. This monthly fall in sales volumes is the joint largest fall in sales volumes (along with December 2021 where sales volumes fell by 1.6% over the month) since July 2021 when all legal restrictions on hospitality were lifted. Non-food stores’ sales volumes fell by 1.9% over the month and were 2.0% below their pre-coronavirus February 2020 levels. Other non-food stores, such as sports equipment and toy stores, reported a monthly fall in sales volumes of 2.8% in August 2022, while department stores fell by 2.7%.
Household goods stores’ sales volumes fell by 1.1% in August 2022, mainly because of falls in furniture and lighting stores. Feedback from retailers suggests that consumers are cutting back on spending because of increased prices and affordability concerns. Clothing stores’ sales volumes fell by 0.6% in August 2022 and were 5.7% below their February 2020 levels.
The British economy expanded 2.9% year-on-year, slightly above the 2.8% forecast however contracted by 0.1% month-on-month compared to 2022’s Q1 and a 0.2% forecast. As stated by trading economics, the annual GDP is forecasted to be 1.3% by the end of this year.
UK’s FTSE 100 is down 3.8% YTM failing for the third time to retest May 2018 7,903 peak. The 6780-support level is a critical price zone for the index to maintain the upward momentum and sustain trading in a range bounded by the 7,687.3-resistance zone.
The interest rate in the United Kingdom is forecasted to be 2.25% by the end of this quarter. The bank of England stated in its August report that the direct contribution of energy to CPI inflation was projected to reach 6½ percentage points in 2022 Q4, nearly 2½ percentage points higher than in the May Report and expected to account for more than half of the overshoot of CPI inflation relative to the 2% target. The rise in energy prices was likely to have additional indirect effects on CPI inflation by increasing firms’ costs, which were then likely to be passed on to a wide range of prices for non-energy goods and services. Bank staff estimated that these indirect effects would contribute around 1 percentage point to CPI inflation in 2022 Q4 and, assuming gas prices would continue to add significantly to inflation during the following year.
Market strategists project higher interest rates, Nomura estimates that the MPC will raise the rate to 3.75% while NatWest markets added 0.55pp to its outlook – 3.5%, and capital economics stated its projection for rates to peak to 4% next year up from its previous forecast of 3%.
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