Barclays, UBS back BoE hikes as inflation risks mount

Barclays, UBS See Early BoE Rate Hikes as Inflation Pressures Persist

Analyst Expectations and Market Reactions to BoE Policy

By Joel Jose

BoE Holds Rates Steady Amid Inflation Concerns

Sept 18 (Reuters) - Barclays and UBS Global Research expect the Bank of England to hike interest rates as soon as November, saying rising inflation risks point to a quicker resumption of policy tightening after the central bank kept rates steady.

The BoE kept interest rates on hold at 3.75% on Thursday as anticipated, but also predicted that inflation could top 4% early next year. Its meeting minutes also struck a more hawkish tone, signalling the BoE could join its European and US counterparts in raising borrowing costs.

Peer Forecasts and Timeline for Rate Hikes

The brokerages join peers including J.P.Morgan in expecting rate hikes in November 2026 and February 2027 following the meeting.

UBS Outlook on Rate Cuts

"We think the BoE will conclude that higher inflation and the potential hit to its credibility would be more costly than tightening now and finding inflation less persistent than expected," UBS economists led by Anna Titareva said in a note on Thursday.Following the hikes, UBS also sees the central bank starting to cut rates in the fourth quarter of 2027 and proceeding at a quarterly pace, eventually bringing the bank rate back to 3.25% by the third quarter of 2028.

Global Inflation Pressures and Central Bank Responses

The expectations come as the widening conflict in the Middle East has fueled concerns over renewed inflation pressures, leaving central banks worldwide grappling with the risk of persistent price growth.The Bank of Japan also raised rates to a 31-year high on Friday and signalled its readiness to keep pushing up borrowing costs.

Energy Prices and Market Sentiment

"The energy outlook has changed dramatically in the last few weeks, especially in the medium term," strategists at Barclays said in their note on Thursday.

Markets are pricing in a 63% chance of a BoE hike in November, with another increase expected in December, according to LSEG data.

Alternative Analyst Views

However, Goldman Sachs, which also expects a November hike, noted that softer economic data or a decline in energy prices could still keep policymakers on hold.

Morgan Stanley expects the BoE to be on a prolonged hold, provided energy prices ease, while BofA Global Research said any additional rate hike would likely serve as a precaution against inflation risks rather than signal a broader tightening cycle.

(Reporting by Joel Jose and Rashika Singh in Bengaluru; Editing by Janane Venkatraman and Maju Samuel)