International Business News – According to some economists, as more people are returning to the labor market, inflation in the UK will struggle in 2023, leading them to expect the Bank of England to fail to meet its expectation of raising interest rates to 3.0% by the end of 2022 .
The market had expected the Bank of England to announce a rate hike of 50 basis points on August 4, and some economists even hinted that another 50 basis point rate hike may be possible in September.
However, Standard Chartered’s European economist Christopher Graham said tightness in the UK labour market was easing rapidly, making the August jobs report all the more important.
In a research note released this week, he said recent evidence points to a more complex picture of the labor market. There appears to be a turnaround in job openings, a sign that the economy is either starting to play through the supply-demand distortions caused by the pandemic, or that hiring is slowing.
Samuel Tombs, chief UK economist at PantheonMacroeconomics, agrees: “We think labour market growth will continue to grow as the number of migrants picks up, as the pandemic subsides and pressure on living standards raises employment participation. stay above average.”
The company expects job growth in the UK to slow due to fewer job vacancies and an increase in labor supply.
As more and more people compete for the same job, an increasing labor supply and steady vacancy numbers will inevitably put downward pressure on wages. When setting interest rates, the Bank of England takes wages very seriously, as rising wages tend to push up inflation.
PantheonMacroeconomics raised its forecast for Britain’s October CPI inflation peak to nearly 12% from just over 11% previously, after a further surge in wholesale gas and electricity prices.
The agency believes that core CPI inflation in the UK has peaked, while producer output price inflation is “about to run into trouble”.
This was due to a series of commodity price declines over the past two months. In addition, manufacturers now have excess inventory and retailers’ profit margins are shrinking in response to weak demand, which has increased during the pandemic. As a result, inflation in the UK will fall sharply in 2023.
The net result of easing labor market conditions and peaking inflation is that the Bank of England will soon be able to pull back from raising interest rates and may not be required to raise rates by 50 basis points in a row.
Market consensus is that the Bank of England will raise rates by 50 basis points at three meetings in August, September and November, followed by another 25 basis points in December, keeping rates at 3.0% until the end of the year.
Standard Chartered’s Graham said: “The mid-August jobs market report will be crucial and will determine whether a 50 basis rate hike is needed later in the year (as the market expects), or the pace of monetary tightening. will slow to a 25 basis rate hike (as we expected).”
He added: “We believe there is enough economic evidence to support a 50 basis point rate hike at the next monetary policy meeting on August 5, but after that, economic activity slows and the labor market is cooling further. Evidence should support a slower pace of rate hikes (25 basis each in September, November and December).
PantheonMacroeconomics expects the Bank of England to raise interest rates twice by 25 basis points each in August and September, when this cycle of rate hikes will end.