Key facts
- Bank of America Global Research expects the Bank of England to raise interest rates by 25 basis points in November and February.
- Higher energy prices are increasing the risk of persistent inflation.
- The Bank of England kept rates unchanged last week, while the US Federal Reserve, European Central Bank, and Bank of Japan raised borrowing costs.
- BofA economists noted that inflation near 4% early next year could fuel wage growth and broader domestic price pressures.
- Markets are pricing in a 67% chance of a BoE rate hike in November, with another increase expected in December.
Bank of America Global Research has revised its outlook, now anticipating two interest rate increases by the Bank of England within the next six months, a shift from its prior expectation of rates remaining steady. This change comes after the Bank of England's recent meeting, where policymakers adopted a more hawkish stance on inflation, influenced by a surge in oil and natural gas prices. This stance has prompted other brokerages, including Barclays, UBS Global Research, and J.P. Morgan, to also forecast rate hikes.
While the Bank of England maintained its interest rates last week, contrasting with the rate hikes implemented by the US Federal Reserve, European Central Bank, and Bank of Japan, BofA economists believe that the pass-through of energy price shocks to domestic inflation and subsequent effects will likely remain contained. However, they acknowledge upside risks, particularly if inflation hovers near 4% in early 2025, which could stimulate wage growth and broader price pressures, potentially leading to further policy tightening.
Despite the revised forecast for two hikes, BofA suggests that markets might be anticipating excessive tightening, as the brokerage foresees the Bank of England beginning to cut rates in 2028, ultimately bringing them down to 3.5%.