Danske Markets expects the Bank of England to raise its rate by 25bp to 4.0% at the November meeting to contain inflation risks. It calls the 100bp of tightening priced in over the coming year likely excessive.
Danske Markets expects a 25bp rate hike to 4.0% from the Bank of England at its November meeting. The bank's aim would be to contain inflation risks. Danske also expects a solid majority of MPC members to vote for the rate hike, citing hawkish recent communication from policymakers.
Energy prices push inflation back up
Inflation was expected to fall back towards target at the beginning of the year, but it has since risen again, mainly because of higher energy prices following the war in the Middle East. Rate expectations have, like in other countries, shifted towards a new hiking cycle, which the BoE would enter from an already restrictive starting point, with the neutral rate estimated at around 3%.
The UK remains a net importer of energy despite significant domestic production, so higher prices pose a stagflation risk. Domestic production nevertheless reduces import dependence and provides a cushion when prices are high.
Growth surprises, but next year looks gloomier
Growth has surprised to the upside, and official forecasters have raised their growth forecasts for this year. They pencilled in a gloomier outlook for next year, as higher energy prices hit consumers and businesses.
Government borrowing costs have also climbed, with 10-year gilt yields trading above 5%. The autumn budget was cautious and broadly in line with expectations, and it added modestly to near-term borrowing without unsettling markets.
Market pricing looks too hawkish
Danske says the longer high energy prices persist, the greater the risk of second-round effects. Additional hikes cannot be ruled out, but it says market expectations shift rapidly and the 100bp of tightening now priced in is likely excessive. The BoE still has muted domestic wage pressure and anchored inflation expectations working in its favour.
Given that pricing, Danske sees the balance of risk tilted towards a less hawkish stance, which would leave some upside risk for EUR/GBP.
Source: ActionForex
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