A series of shocks

The time has passed for unlimited fiscal and monetary support in the UK, and priority is now being given to reducing deficits and lowering inflation. To counter the shock triggered by Russia’s invasion of Ukraine, which promises to further increase the energy and food bills of UK households, the government’s measures to boost purchasing power seem to be rather mild so far. Consequently, we foresee a significant economic slowdown in 2022.

As to monetary policy, there is no longer any room for complacency, as if it were necessary to offset the inaction after the inflation target was surpassed in 2021. On 16 March, the central bank raised its key policy rate for the third consecutive time, bringing it to 0.75%. Although the Monetary Policy Committee (MPC) expressed concern about the impact of the Russian war in Ukraine, it voted almost unanimously (8 votes to 1) for additional monetary tightening. Noting the upturn in inflation expectations in the short and medium term, the MPC esteems that another “moderate” rate increase is still appropriate in the months ahead.

The time has thus passed for unlimited fiscal and monetary support in the UK, and government measures to boost purchasing power have been mild so far. Consequently, we foresee a sharp economic slowdown in 2022.

1 Including, for example, a freeze on the income tax indexation rate and a 1.25 increase in the health insurance contribution rate, for additional annual revenues estimated at GBP 12 billion.