Bank of England: Rate path shaped by energy shock – ING

ING’s James Smith expects the Bank of England (BoE) to raise interest rates in November and February as a precaution against second-round inflation effects, even as evidence of broader spillovers from higher energy prices remains limited. With United Kingdom (UK) inflation forecast to briefly reach 4% this winter, Smith believes policymakers could become more confident by spring that inflation risks are contained, paving the way for rate cuts from November 2027 and into 2028.

BoE hikes then gradual policy reversal

"For the Bank of England, this poses a dilemma. While economic growth has been more resilient than feared, and the jobs market is stabilising, there’s very little evidence so far that the energy shock is spilling into other parts of the inflation basket. Nor is there much evidence that it will do so over the next few months."

"So when the Bank likely hikes rates in early November, it will be entirely for risk management reasons. The truth is it’s still early days and officials will want another few months of data before concluding that the storm has passed. In the meantime, headline inflation is likely to briefly peak at 4% this winter – something officials have historically argued tends to raise the risks of second-round effects."

"We’re less convinced. We expect hikes in both November and February, but by the spring, we think the Bank will be more confident in calling the ‘all clear’ on second-round effects."

"If we’re right, then we think the Bank can start cutting rates again by next November and into 2028."

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