Eco Week
Economic Pulse

Change of direction

02/13/2022
QUATERLY CHANGES

In the UK, like elsewhere, the upsurge in inflation is proving a constant source of surprise, and is prompting the central bank to act. Annual inflation is currently over 5% and the Monetary Policy Committee (MPC) expects it to hit 7% in April, its highest level for three decades. In response, the Bank of England is raising interest rates. Set at 0.1% during the crisis, its base rate was raised to 0.25% in December and then by a further quarter-point in February. Further rate hikes will follow, since the MPC, in line with market expectations, is aiming to increase the base rate to 1.50% by mid-2023.

In addition, like the US Federal Reserve, the Bank of England (BoE) will shrink its balance sheet by no longer reinvesting bonds purchased as part of its quantitative easing plan when they mature. The BoE currently has GBP 895 billion of bonds – mainly gilts – on its balance sheet, equal to around 40% of GDP. This monetary normalisation is taking place at a time when British economy is back to its late-2019 level. UK GDP was badly affected by the pandemic, since the country saw one of the world’s deepest recessions in 2020. It then rebounded spectacularly in 2021 (+7.5%) in large part thanks to an aggressive “whatever it takes” approach. According to the International Monetary Fund’s calculations, government transfers to households and businesses (excluding loans and guarantees) equalled 19% of GDP, practically twice the support provided in the Eurozone.

This caused the public-sector deficit to explode, and although it has since fallen as growth has returned, it remains fundamentally high: the Office for Budget Responsibility estimates that the structural deficit will be 8.3% of potential GDP in fiscal 2021/22. The government is therefore prioritising efforts to reduce it. Some or all of its Covid support measures (reduced VAT on hospitality, reduced stamp duty on property purchases etc.) have been withdrawn. The government is also planning to increase National Insurance contributions in April 2022 and corporate income tax from April 2023.

Jean-Luc Proutat

THE EXPERT ECONOMISTS WHO PARTICIPATED IN THIS ARTICLE

Other articles from the same publication

Editorial
Eurozone sovereign spreads: haunted by the stylised facts

Eurozone sovereign spreads: haunted by the stylised facts

Investor behaviour is strongly influenced by stylised facts, i.e. the historical relationship between economic variables and financial markets. When Bund yields increase, the spread of certain sovereign issuers tends to widen [...]

Read the article
Economic Pulse
Prices and employment both rise

Prices and employment both rise

As shown on our Pulse, the sharp increase in inflation has continued in January, with the harmonised index of consumer prices (HICP) up 6.1% y/y in January [...]

Read the article
Calendars
Vaccinations: world reaches symbolic threshold of 1 billion booster shots

Vaccinations: world reaches symbolic threshold of 1 billion booster shots

In the week of 2-8 February 2022, 19.9 million confirmed new cases of Covid-19 were reported worldwide, 14% less than the previous week. This is the second consecutive week of decline [...]

Read the article