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UK Excess Inflation Expectations

• The upwards trend in consensus inflation forecasts reflects persistent excess effective expectations supporting wages amid policymakers’ failure to re-anchor at the target.
• Easing on the assumption of success predictably negated the required conditions, so we forecasted the problem. Nonetheless, expectations were also stickier than we assumed.
• Without renewed progress, wage growth should keep trending above the BoE’s forecast, discouraging further rate cuts. Hikes may even be needed in 2026 to break excesses.

By Philip Rush

HEW: Wrong Policy Turnings

• As soon as a data point calms nerves around a theme, a hawkish challenge seems to appear. This week, that was US CPI into PPI and UK unemployment into GDP.
• A bias to ease, triggered by a one-touch round of bad news, has consequences when not sustained. The BoE’s early start to its easing cycle has proved to be a policy mistake.
• Next week is a prime opportunity for Chair Powell to calm dovish excitement about Fed easing. UK inflation seems set to rise by another tenth, while the EA rate sticks at 2%.

By Philip Rush

UK: Slowdown Softened In Q2

• June’s remarkable rebound compounded the resilience revealed by April’s upwards revision, which also broke flimsy fundamental stories blaming tariffs for a slowdown.
• IP no longer declined in April, but the broader growth profile still matches the residual seasonality that spuriously drives GDP dynamics in our forecast. H2 will be weaker.
• The BoE discounts headline GDP volatility without blaming seasonality, so another surprisingly strong quarter will be hard for hawks to ignore, reducing the rate cut risk.

By Philip Rush

Norway: Holds Steady on Easing Path In August

• Norges Bank unsurprisingly held rates at 4.25% as expected, maintaining a restrictive stance while inflation persists above 2% target.
• The central bank signals 1-2 more cuts as likely in 2025 if the economy evolves as projected, with a September reduction widely anticipated by markets.
• Trade policy uncertainty and sticky services inflation create upside risks, but the gradual normalisation path remains intact barring shocks.