BoE: War-driven inflation outlook reshapes rate path – Nomura

Nomura’s Global Markets Research team notes UK CPI inflation held at 3.0% year-on-year in February, matching Bank of England (BoE) forecasts. Services inflation stayed sticky, but core measures eased slightly. With the Iran war pushing up energy and fuel costs, Nomura now expects the Bank of England to keep rates on hold throughout its forecast horizon as inflation is projected to re-accelerate.

Iran conflict set to lift UK prices

"Headline UK CPI inflation was unchanged at 3.0% y-o-y in February, against our expectation of a slight fall to 2.9%, but in line with consensus and Bank of England (BoE) forecasts."

"Furthermore, our calculation of the MPC’s services ex volatile/administrative prices slowed in February to 0.24% m-o-m (SA) from 0.51% in January. While the three-month moving average remains high, and above where the BoE would like it to be, it moved in the right direction in February."

"Today’s inflation reading for February means little for monetary policy, within the context of the outbreak of the Iran war, which is likely to drive up inflation from March onwards. Indeed, weekly pump price data already show higher prices in March."

"Last week, we removed the BoE policy rate cuts we had previously been forecasting and now expect the Bank to stay on hold for the remainder of our forecast horizon. At the March MPC meeting, the Bank noted its upwardly revised inflation forecasts, saying that inflation in March would probably be around 0.5pp higher than expected at the time of the February forecast round (i.e. 3.5% y-o-y, up from 3.0%). Also, its Q2 forecasts for CPI inflation are now 3.0% rather than the 2.1% previously forecast, and based on energy futures curves CPI inflation could rise to 3.5% by Q3 (up from 2.0% in the MPR)."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)