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MPC increased Bank Rate to 1.0% in May, whilst downgrading growth and raising inflation forecasts

Date: 16th May 2022

In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the May MPC meeting and the latest UK data:
  • The MPC voted to increase the Bank Rate from 0.75% to 1.0% at its May meeting, as expected. Three of the nine members voted for a rise to 1.25%.
  • The Bank downgraded growth expectations. They still expect growth of 3¾% for 2022, but minus ¼% for 2023 (1¼% in February), in recession territory, and ¼% for 2024 (1% in February).
  • CPI inflation is expected to peak at slightly over 10% in 2022Q4, compared with just under 6% in February, falling back to the 2% target in 2024.
  • Bank Rate is expected to rise to 2¼% to 2½% by mid-2023.
  • GDP grew by a less-than-expected 0.8% (QOQ) in 2022Q1 but was 0.7% higher than pre-pandemic 2019Q4.
  • All the main output sectors (services, production and construction) grew in 2022Q1. On the expenditure side, household consumption and fixed investment were firmer, but government expenditure slipped and there was a significant deterioration in the trade balance.
  • GDP slipped 0.1% (MOM) in March, after zero growth in February, confirming slowdown in the economy.
  • The Markit surveys suggested a further slowdown in activity in April.
  • The car sector remains an especially weak spot in the economy, with March’s production and April’s registrations well down YOY.
  • Bank data suggested the housing market remained fairly firm in March, with a pick-up in mortgage debt and strong house purchase approvals.
  • The Nationwide reported that house prices rose 12.1% (YOY) in April, whilst the Halifax reported house prices were 10.8% (YOY) higher in April.
  • The trade balance deteriorated significantly in 2022Q1, but part of the deterioration reflected a significant adverse swing in precious metals (including non-monetary gold). In addition, the ONS warned that the data in 2022Q1 had been affected by the HMRC’s methodological changes in recording goods trade with the EU and should be interpreted with “caution”.
Concerning other news:
  • The Queen’s Speech outlining the Government’s proposed policies and legislation for the coming parliamentary session, was given on 10 May. Prince Charles, giving the Speech on behalf of the Queen, said the government’s priority “…is to grow and strengthen the economy and help ease the cost of living for families”.
  • The Fed raised the target range for the federal funds rate to 0.75%-1.0% at its May meeting, as expected, and “anticipates that ongoing increases in the target range will be appropriate”.
Ruth Lea said “This Perspective is my last as I shall be retiring as Economic Adviser to the Arbuthnot Banking Group on 25 May 2022, after 15 fascinating and fulfilling years at the bank. During this time, I have written about some momentous events, starting with the 2008 financial crisis, followed by a severe recession. In the early 2010s, the Eurozone crisis threatened to undermine the EU’s single currency. The next major event was the referendum on EU membership in June 2016, in which the British people voted to leave the EU. Brexit was eventually delivered by Prime Minister Boris Johnson in January 2020, after a snap General Election in December 2019.”

“And then there has been the coronavirus pandemic. The first lockdown in response to the coronavirus pandemic was imposed in March 2020 and restrictions of varying degrees of stringency continued until February 2022 (in England). British GDP fell by over 9% in 2020 and the National Audit Office (NAO) has estimated that the Government’s measures in response to the pandemic summed to £370bn. Inflationary pressures, triggered by economies opening after lockdown, have, of course, been exacerbated by Russia’s invasion of Ukraine in February 2022 and the knock-on effects on energy prices. And we are now faced with rising inflation, squeezed real incomes and stagnant, if not falling, output. Extraordinary times, indeed.”

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Ruth Lea, Economic Adviser 
07800 608 674, 020 8346 3482 
Follow Ruth on Twitter @RuthLeaEcon

Sam Cartwright 
020 7379 4415