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Global Economic Outlook – September 2022 The Bank of England has responded to the high levels At the time of writing, sterling is down by 6.4% against the of inflation by accelerating the pace of monetary policy U.S. dollar since the start of September, while 5-year gilt tightening, and we expect Bank Rate to reach around 3.5% yields are around 190 basis points higher. Financial markets early in 2023. Monetary policy is expected to be more now expect interest rates to reach around 6% next year hawkish due to the need to counteract the inflationary (see Chart 43), although given the latest inflation outlook we impact of the Government’s energy support through find this scenario to be less likely. this winter, as it has the potential to raise inflation in the medium term by shoring up household incomes and The combination of high inflation, which erodes the spending against more extreme energy price fluctuations. real value of earnings, and rising interest rates, which raise the cost of debt, have created the conditions for The new Government announced a large package of fiscal an unprecedented squeeze on household incomes. In loosening amounting to around £160 billion over the next September, UK consumer confidence fell to a record low as two years, equivalent to 3.2% of GDP per annum. This the effect of the income squeeze was felt by households. included £45 billion of permanent tax cuts, funded by higher This could signal a shift in demand towards more essential borrowing. Following this announcement, worries about goods and services. In addition, a more cautious attitude the sustainability of UK public finances have led to a sharp to spending could lead some to maintain a higher level of increase in Gilt yields and a fall in the value of the pound. savings buffer, which would further weaken consumption growth. We therefore expect overall consumption to grow by 3.7% this year and fall by 0.4% in 2023. Chart 43: Market expectations for the peak in Bank Rate over the next 5 years Investment is also expected to remain weak throughout the next 15 months due to weaker growth lowering 7% investment returns, higher cost of borrowing due to 6% tighter financial conditions, and the expected phasing out of the Government’s super deduction scheme on plant 5% and machinery investment, which is due to end in March 4% 2023. Offsetting this may be an increase in public sector investment, although details of specific policies remain Interest rate3% unclear. Our latest estimates for investment point to growth 2% of 5.8% in 2022, followed by a milder rise of 1.3% in 2023. 1% 0% 2008 2010 2012 2014 2016 2018 2020 2022 Bank Rate Expected peak in Bank Rate Source: Bank of England, BIS, KPMG analysis. Note: Latest data are for 26 September. © 2022 Copyright owned by one or more of the KPMG International entities. KPMG International entities provide no services to clients. All rights reserved. 46

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