British Pound: BoE tightening bias supports higher rates – UOB

UOB’s Lee Sue Ann notes that the Bank of England has resumed tightening, lifting the Bank Rate to 4.00% and signalling a hawkish shift as inflation risks re-emerge. The Nov Monetary Policy Report projects CPI near 5.0% by mid-2027 and only back to target in 3Q28. UOB now expects another 25bps hike to 4.25% in Feb, with risks skewed towards further tightening.

BoE resumes tightening as inflation risks rise

"We no longer view Nov as a one-and-done move. While Dec remains live, we see Feb as the more likely timing for the next 25bps hike to 4.25%, with risks skewed towards additional tightening if inflation pressures prove to be more persistent."

"The policy shift reflects a significant upside in the inflation outlook since the Sep meeting. The BOE noted that the prolonged conflict in the Middle East has continued to push energy prices higher."

"The latest Nov Monetary Policy Report now projects inflation to reach around 5.0% by 2Q27 before gradually returning towards target. The BOE stressed that while direct energy effects remain the primary driver, the longer energy prices stay elevated, the higher the risk that businesses pass through costs and workers seek higher wage settlements, generating broader inflation persistence."

"Against this backdrop, headline CPI is now projected to rise from an average of 3.1% y/y in 3Q26 to nearly 5.0% by mid-2027, before returning to the 2% target only in 3Q28. Compared with the forecasts made in the Jul Monetary Policy Report, inflation is expected to peak around 1.5-2.0ppts higher and remain above target for substantially longer."

"Looking ahead, we no longer view the Nov move as a "one-and-done" insurance hike. Inflation is expected to move further away from target over the coming quarters and remaining above target until 3Q28."

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