UK inflation forecasts beyond June 2016 - RBS

Research Team at RBS, suggests that the UK's referendum vote to leave the EU, on 23 June 2016, has prompted a sizeable depreciation in sterling - a peak-to-trough move of almost 11%.

Key Quotes

“This currency depreciation will push CPI inflation significantly higher in the near-term. On our estimates, the first-round impact of a (sustained) 11% depreciation in sterling would raise import price inflation by 5.5% points and CPI inflation by 1.7% points.

Our updated forecasts assume a further fall in sterling as the BoE delivers pre-emptive monetary policy easing and as economic data deteriorate sharply.

Monetary policy easing: we forecast two 25bp Bank Rate cuts, in July & August 2016, followed by a resumption of QE purchases by Q4 2016, which will boost CPI.

CPI inflation is f/cast to climb to 1.5% at end-2016 (prev. 1.1%) and 2.2% at end-2017 (prev. 1.4%). The peak in CPI is now forecast to be 2.7% in Aug 2017. Core CPI inflation is forecast to rise to 1.8% at end-2016 (prev. 1.4%) and 2.7% at end-2017 (prev. 1.7%), with a peak of 3.1% in August 2017. In essence, although we expect a sizeable and fairly rapid rise in CPI inflation over the next 12-18 months, we expect this to be temporary given weak fundamentals.

CPI inflation is likely to be declining by the latter part of 2017 and quite possibly below the 2% target by mid-2018.

For the MPC, it will be where CPI is forecast to be during H2 2018 - H2 2019 that will drive monetary policy. Needless to say, there is an unusually large degree of uncertainty surroudning these forecasts. The MPC's forecast update will appear on 4 August 2016.”