Citi is forecasting a sharp fall in inflation, higher interest rates and improved public finances in the wake of easing energy prices, yesterday’s better-than-expected PMI and government borrowing numbers.
The bank now expects consumer price inflation to fall to 2.4% in the fourth quarter of this year (including to 2.3% in November) and to 1.9% by the first quarter of 2025, below the Bank of England's 2% target. Retail price inflation is forecast to decline to 3.6% in the first quarter of 2024 and to 1.1% by the first quarter of 2025.
Expected falls in energy bills were a big reason for the lower inflation prediction, as wholesale gas prices have halved in the past two months and are down 80% since last summer's peaks.
But higher interest rates could result from the strong data, Citi suggested.
“While we would be wary of extrapolating too far beyond the first quarter, a stronger outlook for this quarter and conceivably quarter two we think suggests the Bank Rate is likely to increase further than we thought,” the bank's economists wrote.
They forecast a further 25bps hike from the BoE in March, with May's decision still in the balance.
Earlier this month, Bank governor Andrew Bailey pointed to energy price falls among several "powerful downward forces" on inflation this year, though he and his colleagues still had raised rates as their projections indicate inflation will still only come down below 5% by the end of the year.
Citi also painted an improving picture on public finances noting the better than expected surplus yesterday which reflected larger-than-expected increases in self-assessed tax receipts, reduced debt servicing costs and lower public investment.
With central government net cash requirement currently running £15.6bn below expectations, “we see potential for this gap to widen into the end of the fiscal year – with the large increase in borrowing currently planned in March now especially suspect.”
“Overall, we now expect a gilt remit of £246bn for fiscal year 2023/4,” Citi concluded.