Rising uncertainty set to limit scale of rate hikes in the United Kingdom

The week’s data showed further evidence of a decent bounce back in activity after the initial emergence of Omicron, and that inflationary pressures are still building. This is likely to reinforce the MPC’s fears about a wage-price spiral developing and another 25bp rate hike at March’s meeting looks almost certain.

What you will learn:

• January’s Money & Credit release reported a strong rebound in gross unsecured lending, as the drop in Covid case numbers and relaxation of isolation rules drove a recovery in social consumption activities.
• But market pricing, which implies a Bank Rate of around 1.75% at the end of the year, looks completely out-of-kilter with the outlook.
• A worsening real income shock and significant downside risks are consistent with a much more cautious approach, and we expect Bank Rate to finish the year at 1%.