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On their latest call, BofA says that “by lowering peak inflation we see the govenment’s energy price cap allowing the BOE to avoid increasing the pace of hikes. But more fiscal stimulus means the BOE will have to hike more overall”. Adding that they expect a 0.50% rate hike next week and in the next two meetings, followed by further 0.25% rate hikes next year to 4%.
The firm previously noted at the end of July that the UK will enter a recession next year as higher inflation , aggressive rate hikes and weaker consumer demand will weigh on economic activity. Having also previously noted that “we assume no rate cuts until late 2024 compared to mid-2023 in market pricing”.
It will be interesting to see how the BOE walks this tightrope as we are already starting to see policymakers dial back on the hawkishness – most notably Tenreyro here.