Inflation is expected to fall by 40 basis points from the Bank of England’s latest forecast of 5 per cent by the end of 2023. But there are “renewed fears of recession”, according to Deutsche Bank.
Inflation fell again to 6.8 percent during the year ending in July, compared to its highest level in 40 years of 11.1 percent in October last year.
While the government has pledged to halve inflation by the end of the year, and the latest forecast from the Bank of England’s Monetary Policy Committee points to five per cent by December 2023, economists at Deutsche Bank are more optimistic.
They said they expect Consumer Price Index (CPI) inflation to slow to 4.6 percent within three months – 40 basis points lower than official forecasts.
“Although the August CPI will almost certainly rise (due to higher station prices and liquor fees), it will remain flat in a downward trend,” wrote Sanjay Raja, chief economist at Deutsche Bank. “A further decline in energy prices will push the CPI lower.” consumer prices in October (dual-fuel bills will drop by seven percent).
“Food prices are starting to normalize, with plenty of downside momentum ahead. Commodity inflation is now in line with typical expectations, given lower import price pressures and PPI pressures. We expect to see some downside momentum in things like restaurant prices.” , with businesses’ food and energy bills looking less worrisome than they were a year ago.
The base rate peak is near
This is important because easing inflationary pressures will give markets “more options to price in further rate cuts during 2024 by the end of this year,” Raja added.
In fact, the Bank of England’s Monetary Policy Committee has raised the base rate 14 times in a row (now at 5.25 per cent) since December 2021 in a bid to curb inflation. But the bulk of the monetary tightening has not yet fully hit the economy. Given this, Deutsche Bank said the BoE is unlikely to go much further.
“Our base case includes two more spikes – in September and November – but there is growing uncertainty surrounding our call.
“The recent BoE talk suggests that the bar for further hikes may rise faster than we thought. The MPC appears to have more confidence in its models. It may also be a take on other central banks that are actively advocating pauses,” Raja wrote. “.
Recession risks “are also likely to play a role in the bank’s unease about raising interest rates much further,” he added.
Recession risks
The economist explained that the UK has so far avoided a technical recession, “despite the bright warning signs throughout most of the year.”
But recent business surveys have “rekindled fears of a recession”, said Deutsche Bank, so it cannot rule out a recession just yet.
However, it does not expect the economy to contract in the third quarter of 2023 due to “strong second-quarter phase effects” and the recovery in real disposable income which means the economy will continue to grow modestly (0.2 percent qoq). a fourth).
Raja added that unemployment is also rising (0.4 percentage point to 4.2 percent this year) with redundancies rising and job vacancies decreasing, and noted that the unemployment rate could reach 4.5 percent by December, “much higher than estimates.” monetary policy committee of 4.25 percent.
“While we continue to see the UK economy avoid recession over the next year or so, we also realize that it won’t take much to push the economy into recession territory,” he said.