The Bank of England has issued a new Monetary Policy report, with revised forecasts for inflation. The Bank also states that the UK economy is likely to enter recession in Q4 2022.
Consumer price inflation, driven principally by price rises in energy, food, and physical goods hit 9.4% in June. The Bank now forecasts inflation to continue to rise in the coming months, peaking at 13.3% in Q4 2022.
This is a significant increase compared to the Bank’s previous prediction of 10% in Q4 2022. The major change over this period has been increased expectations of the energy price cap. Analysts now expect the energy price cap to rise by more than 70% in October.
Inflation is also expected to persist for much longer than previously forecast. Concerningly, inflation in Q3 2023 is expected remain very high at 9.5%, this is a 3.6 percentage point increase compared the Bank’s previous forecast.
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The above chart outlines the dramatic changes to the Bank’s forecast for consumer price inflation over the coming years. The Bank expects inflation to tail off back to its 2% target by late 2024, although several global events may threaten this such as worse than expected disruption to European gas supplies and continuing supply concerns of key commodities.
As a result, the Bank has increased interest rates by 0.5% to 1.75%, the largest interest rate rise since 1995. Interest rates are now at the highest level since 2008. It is expected that interest rates will continue to rise further in order to curb inflation, reaching 3% in Q3 2023 – this would still be fairly low by historical standards.
A combination of exceptionally high inflation and rising interest rates are forecast to have a significant impact upon economic activity. The Bank is now forecasting the UK economy to enter a recession from Q4 2022, once the October energy price cap is announced on 26th August.
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The economic contraction is expected to last for the following five quarters, before the UK enters a period of stagnant to weak growth in the medium term to 2025. This is a significant downgrade to the UK economic outlook, with the Bank previously forecasting flat GDP performance. The weakness of recovery from the anticipated recession is especially concerning.
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