Bank of England: November hike risk rises – Rabobank

Rabobank’s Stefan Koopman notes that the Bank of England kept Bank Rate at 3.75% in a 6-3 vote, but sees rising inflation risks from higher energy prices and the Middle East conflict. RaboResearch now expects a 25bp hike to 4.00% at the November meeting, followed by a long hold and eventual cuts in 2027–2028.

BoE seen hiking then reversing

"The Bank of England held Bank Rate unchanged at 3.75% in a 6-3 vote, as forecast. However, the MPC's communication reinforced the view that the balance of risks gets more skewed towards higher inflation. If energy prices stay where they are, second-round effects will become a more pressing policy concern."

"Reading between the lines, the message from the MPC is that it would *still* prefer to keep rates on hold for as long as possible, much as it did through the spring and summer. However, unless the situation in Iran de-escalates, which they currently do not expect, they will eventually have to conclude that a rate increase is necessary. At that point, we think it will indeed opt for a “performative hike” to demonstrate that it remains alert to the risk of second-round effects."

"Given the changes to our energy price forecasts, and with the BoE the only one of the four major central banks (the Fed, ECB, BoJ and BoE) not to have tightened policy in response to the latest energy shock, the November meeting has become a very live one. We therefore add a 25bp rate hike to our forecast for November, taking Bank Rate to 4.00%. This assumes the Autumn Budget will be absorbed smoothly."

"That said, as we argued in our preview and previous communications, we do not believe domestic economic conditions warrant much tightening. Nor do we expect the sustained hiking cycle currently priced by markets."

"In our view, Bank Rate at 3.75% is already restrictive, around 50bp above neutral. Any further increase is therefore likely to prove temporary, raising the prospect that the MPC will ultimately need to reverse the move with an additional rate cut in 2027 and 2028."

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