Bank of America Sees Two UK Rate Hikes as Energy Prices Fuel Inflation Outlook
Bank of America’s Revised Interest Rate Forecast Amid Energy Price Surge
Sept 23 (Reuters) - Bank of America Global Research became the latest brokerage to expect the Bank of England to raise interest rates twice over the next six months, as higher energy prices raise the risk of persistent inflation.
Details of the Expected Rate Hikes
In a note on Wednesday, the brokerage said it expects the central bank to raise rates by 25 basis points in November and February, reversing its previous forecast for rates to remain unchanged before a cut in November 2027.
Influence of Recent BoE Meeting and Market Sentiment
The shift follows last week's BoE meeting where policymakers struck a firmer tone on inflation risks, particularly those stemming from a recent surge in oil and natural gas prices, prompting brokerages Barclays, UBS Global Research and J.P. Morgan to forecast rate hikes.
Comparison with Other Major Central Banks
The BoE stood out among major central banks this month, keeping rates unchanged while the US Federal Reserve, European Central Bank and Bank of Japan opted to raise borrowing costs.
Inflation Risks and Economic Impact
"We expect the passthrough of the energy shock to domestic inflation and second round effects to remain somewhat contained, but risks are on the upside," BofA economists said in a note.
The brokerage said inflation staying near 4% early next year could fuel wage growth and broader domestic price pressures, increasing the risk that policymakers tighten policy further.
Market Expectations and Future Outlook
Markets are pricing in a 67% chance of a BoE rate hike in November, with another increase expected in December, according to LSEG data.
Despite the revised outlook, BofA said markets may be pricing in too much tightening, as it expects only two rate hikes before the BoE begins cutting rates in 2028, ultimately bringing the rate back to 3.5%.
Reporting Credits
(Reporting by Rashika Singh in Bengaluru; Editing by Sahal Muhammed)
