BoE Preview: Forecasts from 10 major banks, the final hike?

We expect a 25 bps rate hike. That would lift Bank rate to 5.50%. Policymakers have recently entertained the possibility of an interest rate pause. The softer PMI prints and lower monthly GDP data raise concerns over a more entrenched slowdown – the million-pound question is whether this will be enough to get rid of similarly entrenched inflation. Further out, we have no more rate increases in our forecasts, but we do see rates remaining at elevated levels. Traders have reassessed their outlook and see rates peaking at 5.55%.

While upside surprises to wage growth and services inflation suggest some risk of a 50 bps hike, tepid growth and a rapid rise in the unemployment rate likely ensure policymakers will settle with a 25 bps increase. Forward guidance will likely continue to state that further evidence of persistence in core wages and service inflation would lead the MPC to hike further.

We expect another 25 bps hike that would take the Bank Rate to 5.5% and see another, potentially final, hike in November.

Markets are once again toying with the idea of a pause from the BoE. We certainly don’t rule that out. The central bank might be tempted by a Fed-style ‘skip’ this month, accompanied by strong hints that it could hike again in November. That’s not our base case, given both wage growth and services inflation are higher than forecasted back in August. We suspect the Bank will keep its options open for November, but ultimately we think September’s meeting will mark the peak in this hiking cycle.

The end of the tightening cycle is approaching. We look for another 25 bps rate hike at the September meeting and expect those voting for 50 bps in August to revert to 25 bps at this meeting. We may also see more than one dissenter for unchanged rates. Should the Bank hike by 25 bps, as we expect, the debate should then turn to whether this will end up being the de facto end of the cycle. Our current call is for the Bank to raise rates again for a final time in November, though market pricing highlights the very real risk the tightening cycle will be done after this week’s expected hike. In that context, the MPC’s guidance bears careful monitoring. In August, the MPC repeated the need for further rate hikes, should inflation pressures persist. While we expect similar sentiments to be echoed this time, we also think the wording could be toned down.

We still think it likely that the MPC will raise Bank Rate one last time by 25 bps to 5.5%. By the time of the November meeting, we believe the further loosening in the labour market and softening economic data are likely to convince the MPC that it has done enough to bring inflation under control. But if pay continues to overshoot the Bank’s forecast, there is a risk of even more tightening.

We expect the BoE to hike the Bank Rate by 25 bps, although August inflation released the day before marks a joker. We expect a peak in the Bank Rate of 5.50%. We see current market pricing of a peak in the policy rate of 5.60% as broadly fair. EUR/GBP is set to end the day higher on dovish commentary.

We expect the MPC to back a final 25 bps move, the fifteenth in succession. Another move is possible for November, but unlikely with signs that economic weakness is beginning to broaden. The MPC is in the process of transitioning to a more forward-looking policy approach. This is far from simple. A pause as early as this week is also plausible, but with services inflation above 7% (as well as forecast) and regular pay growth above 8%, this should pull the majority in favor of a move this week. Instead, the MPC may lean on the benefit of a forecast round and MPR to explain any potential hold. Guidance changes will likely be limited. 

We anticipate the BoE to deliver another 25 bps rate hike, bringing the policy rate to 5.50%. We believe the BoE stands out among G10 central banks largely due to UK inflation that has not been tamed. Growth prospects for the UK also remain dismal, with our forecast for recession to begin in Q4-2023. Considering this, we believe the British Pound will underperform through the end of 2023 and 2024. Inflation remains the primary concern for the BoE, with the July CPI YoY print coming in at 6.8%, and core CPI also remaining elevated at 6.9%. Though inflation has fallen from its 11.1% peak in October of last year, price growth is still a long way from the BoE’s 2% inflation target. Overall, we firmly believe that the BoE has more tightening to do before inflation is properly reined in.

We expect the BoE to raise its policy rate by 25 bps, taking Bank Rate to a new post-financial crisis high of 5.5%. We expect the MPC to maintain its openness to a further rise in interest rates, but given the significant volatility in UK macro data over the past year, and the mixed signals the economy has been sending, we think the Bank will continue to avoid giving clear forward guidance and instead only keep its tightening bias. Our base case is that this will be the last rate hike of the cycle. With unemployment rising and the energy crisis having receded, our base case is that wage growth will peak very soon. This should convince the MPC to be patient at coming meetings and to wait for the impact of previous rate hikes to fully materialise. Still, we expect rate cuts next year to proceed at a much slower pace than for the Fed, as we expect core inflation to remain more sticky for longer in the UK than in the US.