UK PMIs add more fuel for Bank of England hawks
The latest UK PMIs indicate that price pressures are the strongest since the late 1990s, which will further cement the markets' conviction that rates will need to rise in November. However we think investors are overestimating the scale of Bank of England tightening over the next year
There’s much for the Bank of England hawks to get their teeth into, in the latest UK purchasing managers indices. Both the manufacturing and the services PMIs increased on September’s level, and the standout statistic from the IHS Markit press release, is that price pressures are signalled to be the strongest since the late-1990s across the private sector. There are also signs that wage pressures are continuing to grow amid shortages in parts of the workforce.
This will further fuel investor expectations that the Bank of England’s November rate rise will need to be swiftly followed by even more tightening.
| 58.0 |
UK services PMIPrev: 55.4 |
| Higher than expected | |
Still, we’d caution overinterpreting today’s figures. The PMIs haven’t been the best predictor of economic growth through the pandemic. We still feel that fourth-quarter growth is likely to come in at around 1%, around half what the Bank of England had forecast back in August. There’s been no let-up in supply chain constraints in the manufacturing sector, which the latest PMIs suggest is barely growing.
We continue to think markets are overestimating the scale of tightening
Meanwhile, rising energy prices are quickly translating into a noticeable fall in consumer confidence. The tightening of fiscal policy, via a cut in welfare payments and forthcoming tax rise in the Spring, will add a further constraint to household spending, particularly among lower earners. Add in the residual risk of greater caution among individuals if Covid-19 hospitalisations were to rise more quickly than expected over the next month or so, and we think growth momentum is likely to be gradual over the winter months.
None of this is likely to dissuade the Bank of England from increasing interest rates next month. Yesterday’s FT interview with the newly-appointed Chief Economist Hugh Pill, made it clear that inflation is by far the biggest concern right now.
But this masks the fact that there is great uncertainty surrounding wage growth and where it is likely to head next year, given the recent ending of the furlough scheme.
We, therefore, continue to think markets are overestimating the scale of tightening we’re likely to see from the Bank of England next year. We think one, or perhaps two, further rate rises in 2022 is likely to be the limit, particularly given these will be coupled with some balance sheet reduction.
UK economic dashboard points to steadier growth
