After months of speculation, changes to the UK energy price cap have finally been announced. The figure set by Ofgem has risen by 80% to £3,549 as a difficult winter for households continues to loom. (The price cap is the maximum a typical household can pay for their energy but is continually reassessed by Ofgem every three months.)
Forecasts are now suggesting that the cap will peak in the second quarter of next year at £6,616.37 according to Cornwall Insights before dropping below £6,000 by the end of 2023. It looks like energy prices will remain elevated in the short and medium term given the lack of resolution to the Ukraine conflict and the government’s lack of direct intervention in the market.
A report from Citi earlier this week stoked inflation fears as UK CPI was forecasted to hit 18.6% the highest rate amongst Western economies. Other banks including Goldman Sachs and Bank of America maintained lower projections in the 14-15% range, still higher than the Bank of England’s forecast of 13% by the end of the year.
The surge in higher predictions was caused by a rapid rise in natural gas prices in Europe with prices for next-day delivery jumping 33% on Monday. Citi’s projected rate would be higher than the peak hit during the 1979 OPEC crisis when inflation hit 17.8%.
Markets are now pricing a 225 basis point rise in the Bank of England base rate by next May. Swaps markets are now expecting the current rate of 1.75% to double over the next nine months as inflation and energy price fears continue to bite. The cost of short-term borrowing for the British government has risen by 1 percentage point in August, the largest jump since Bloomberg records began in 1992. Movement in gilts has been one way as inflation fears continue and expectations remain that the Bank will take harsh action until inflation begins to subside.
Although the Bank will be driven by inflation data to raise rates, increasingly weakening economic data will make the MPC weary of triggering a deep recession. UK PMI continued to fall as it borders on a contraction with a reading of 50.9, below consensus expectations of 51.1. A PMI reading of below 50 would suggest a contraction in UK economic activity.
Despite falling economic activity and worsening consumer confidence, it still seems likely that a 50 basis point rise is on the cards when the MPC meets in three weeks’ time.
The ONS announced this week that 2020 GDP fell by 1.7 percentage points more than initially thought, implying that current GDP may still be below pre-pandemic levels.
Elsewhere the data is not looking any better. Eurozone PMI was down to 49.2 points, the second consecutive month signifying contraction in business activity. In individual countries, Germany experienced the biggest reversal in PMI activity in two years while French business activity also contracted.
Minutes for the July ECB meeting at which the central bank hiked rates for the first time in more than a decade were released on Thursday. The depreciation of the euro was widely regarded as an inflation threat by policymakers, an effect still likely to apply given that the euro dropped to $0.9901 against the dollar on Tuesday. The weakening euro combined with high input costs will continue to drive Eurozone inflation and is likely to continue to worsen the economic outlook.
German inflation is expected to hit 70-year highs over the next 9 months while economists have generally slashed growth estimates for the European powerhouse. Difficulties including drought, energy prices and subsequent low consumer and business confidence have created a perfect storm that will almost certainly cause a technical recession in the third quarter.
In the US, markets are increasingly pricing Fed rate cuts as slowing economic growth begins to hit and inflation has fallen slightly. However, economists are increasingly highlighting the disconnect between markets and stated Fed policy as many believe the Fed has not yet seen the substantial reductions in price rises that it needs to begin throttling its monetary tightening.
Traders are pricing rates to peak in March 2023 at 3.7% before rate cuts to 3.3% by the end of 2023 whereas bank forecasts suggest there will be no rate cuts until early 2024. The Jackson Hole Symposium today and Saturday will be eagerly watched for indications of rate changes at the September meeting.
To close with some more obscure news, the art collection of Microsoft co-founder Paul Allen is due to go on sale soon. The 150 pieces in the collection span 500 years of history and include masterpieces from Renoir, Botticelli and Paul Cezanne. The collection is valued at $1 billion and the proceeds of the auction will be donated to charity, in line with the wishes of Paul Allen.
