More BoE rate hikes, UK inflation near 7% in 2022 - Capital Economics

(Alliance News) - UK annual inflation will peak at a higher rate than most analysts expect, Capital Economics predicted on Thursday, with the economic research house tipping the Bank of England to hike the key Bank Rate to 1.25%.

Capital Economics analyst Paul Dales set out a series of predictions and risks to the UK economy in 2022.

Dales believes UK annual inflation will peak close to 7% in April, rather than 6% forecast by many economists and the BoE. The Capital Economics analyst said this means the consumer price index will stay above the BoE's 2% target for longer.

Dales explained: "This new forecast stems from the recent rises in wholesale energy prices and core producer prices having been bigger than we expected. We now assume that utility prices will rise by 50% on 1st April compared to 15% previously.

"The result is that we now think CPI inflation will rise from 5.1% in November to a peak of 6.9% in April (5.4% previously) and that by December 2022 inflation will still be 4.0% rather than 2.2%."

It will lead to more interest rate hikes by the BoE, Dales said, expecting Bank Rate to sit at 1.25% by the end of the year, versus 0.25% now.

"It's possible that once the bank has another one or two rate hikes under its belt, it will put more weight on the weakening activity outlook. But the lesson from last year is that the Bank will defend its 2% inflation target," the analyst added.

The UK's real gross domestic product growth will be below BoE forecasts at 3.7% in 2022, Dales predicts. The BoE expects growth of 5.0%.

The lower than expected growth will be partly down to Omicron but also inflation putting a squeeze on household disposable income.

However, 2023 will be a better year than most predict, Dales added.

"The economy will still enjoy a more complete recovery from the pandemic than most expect, with GDP rising by 3.5% in 2023 rather than the consensus forecast of 2.2% and the Bank of England's forecast of 1.6%. We have become more worried that the interaction of the pandemic and Brexit will leave more scars on the labour market and exports. But fewer firms have entered bankruptcy than we expected and the pandemic may have boosted long-term productivity rather than reduced it," the Capital Economics analyst explained.

Meanwhile, the pound will lose ground on the dollar but strengthen against the euro, Dales tipped. He forecasts the pound to sit around EUR1.20 by the end of this year, and EUR1.24 by the end of next year. However, sterling could weaken to USD1.30 versus the greenback, meanwhile.

On Thursday afternoon London time, the pound fetched USD1.3535 versus the greenback and EUR1.1964 against the single currency.

By Eric Cunha; ericcunha@alliancenews.com

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