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Looking forward, economically:

7 March 2022

The three key elements expected to impact the economy this year are inflation, interest rates and house prices.

Inflation rose to 5.5% in January - the highest it's been since March 1992, and a level that some people will not have experienced in their working lives.  It's edging closer to its peak in April, which the Bank of England was predicting to be around 7%, but may be more like 8% given the recent impact of the Ukraine conflict on energy prices.  The impact on personal income is expected to be significant.  For example, inflation at 8% would reduce the real value of take-home pay by around £2k for a person on the median salary of £30k - and that’s before we factor in increased National Insurance contributions and higher interest rates.

Unemployment is close to pre-pandemic levels (currently 4.1% vs 4.0% in February 2020).  As a result, employers are struggling to find staff amid a worsening labour shortage.  Transport, hospitality, and education are the hardest-hit sectors. 

Market interest rates have risen sharply.  For example, the 5-yr swap rate was 1.6% as at 28/02/2022.  This reflects the expectation that there will be further Bank of England base rate increases in 2022, with the expectation that it will peak at around 2.0% next Spring. 

There will be more to monetary policy than rate hikes in 2022 and beyond.  Starting in March, the Bank of England has said it will start to shrink its balance sheet - a policy known as “quantitative tightening”.

House prices rose by around 10% in 2021, and by 15-20% since the onset of the pandemic.  The Bank of England has said that around half of that increase is due to the "race for space".  Most economists expect much slower growth in 2022, of 2-3% increase, but no correction in their central forecasts.  The mortgage market is likely to return to a more stable environment according to UK Finance following a turbulent two-year period.  It said gross secured lending was likely to fall to £281bn this year, from a bumper year of £316bn in 2021.

Please note: The information provided in this blog is general information only and should not be interpreted as financial or legal advice from TSB.