British economy continues to shrink

[UK GDP is expected to contract by 1.4% in 2023]

Britain's independent Office for Budget Responsibility (OBR) gave a bleaker outlook, predicting that UK GDP will contract by 1.4% in 2023, even as the Bank of England and government are forced to tighten monetary and fiscal policy to curb inflation and prevent the economy from overheating. In its Economic and Fiscal Outlook last week, the agency said its trade forecasts reflected an assumption that Brexit would result in the UK's trade intensity (the degree to which an economy integrates with the world economy) in the long run compared with the UK's remaining in the EU. 15% lower.

[UK job market continues to tighten]

According to data released by the British government, in the three months from June to August, the unemployment rate in the UK fell to 3.5%, the lowest level since 1974. The number of job vacancies also fell for the third straight quarter, the biggest drop since mid-2020, and is near record highs, but there were still significantly more open jobs than unemployed job seekers. That has monetary policymakers concerned that wage pressures will remain strong even as the economy slows, with a spiraling wage-inflation spiral making it harder to curb inflation.

[British inflation has repeatedly set historical records]

The CPI rose by 10.1% year-on-year in July, fell slightly to 9.9% in August, and rose again to 10.1% in September. According to the data released by the National Bureau of Statistics of the United Kingdom last week, the CPI in October in the United Kingdom rose by 11.1% year-on-year, and the growth rate hit a new high. Rising gas and electricity prices were the main factors driving up inflation, the data showed. Natural gas prices have risen nearly 130% over the past year, and electricity prices have risen about 66%. A sharp rise in food prices has also pushed up inflation. Prices of food and non-alcoholic beverages have risen for 15 consecutive months, rising 16.4% year-on-year in October, the highest increase since September 1977, the data showed.

[The Bank of England still has strong interest rate hike expectations]

The Bank of England has raised interest rates eight times in a row since December 2021, and has now raised the benchmark interest rate to 3.00%, a new high since November 2008. But at present, inflation has not been effectively suppressed. According to the data released by the National Bureau of Statistics of the United Kingdom, the consumer price index (CPI) in the United Kingdom in October rose by 11.1% year-on-year, and the increase hit a new high in 41 years. High inflation and a major shift in fiscal policy have kept the Bank of England on track for aggressive rate hikes.

[The pace of interest rate hikes is difficult to change in the short term]

Due to high inflation, the Bank of England should continue to raise interest rates in the short term. Given that inflation remains high and the labor market remains tight, no resistance to further policy tightening is expected in the near term. But if the economy slows down, the Bank of England may pause interest rate hikes in the first quarter of 2023, and the Bank of England's terminal rate will be lower than the current market pricing, which is currently priced at around 4.85%. The BoE is likely to secure lower terminal rates by "keeping rates at restrictive levels for an extended period beyond 2023"