Deutsche Bank has shifted its Bank of England call to two quarter-point rate hikes, in November and February, reversing its earlier no-further-hikes stance. The bank points to September's policy decision as a signal that the BoE's tolerance for elevated inflation is beginning to wane, with price growth on track to approach 4% by year-end.
Deutsche Bank has revised its Bank of England outlook, now expecting two quarter-point rate hikes — one in November and one in February — after previously projecting no further increases. The bank's economists say September's policy decision suggested the central bank's tolerance for elevated inflation was starting to wane.
Inflation on track to approach 4%
UK inflation rose to just over 3% year-on-year in August, and Deutsche Bank expects it to reach around 4% by year-end. Governor Andrew Bailey said almost all of the rise in consumer prices since the Middle East conflict began could be attributed to higher energy prices, the bank said. Headline inflation has climbed above core inflation, at 3.1% versus 2.6%, while Deutsche Bank's measures of domestically generated inflation have barely moved in recent months.
Insurance hikes, not a new cycle
The economists said the hikes would likely serve as insurance rather than mark the start of a sustained tightening cycle, with the outlook still dependent on energy prices. The Monetary Policy Committee's voting split was unchanged from July, with Huw Pill, Megan Greene and Catherine Mann backing a rate increase, and the MPC left its broader guidance unchanged.
September's minutes played down stronger-than-expected activity data. According to Deutsche Bank: the minutes described the economy as only "somewhat more resilient" despite growth running at close to a 2.5% annualised pace. The labour market remained weak, with spare capacity still present, the minutes said. Most MPC members judged financial conditions were already providing a broadly sufficient degree of monetary restraint, potentially raising the hurdle for further rate increases, and the minutes pointed to limited signs of second-round effects in firms' price expectations, wage expectations and early 2027 pay settlements.
Energy shock a third the size of 2022's
Deutsche Bank's Taylor Rule estimates put the appropriate policy rate only slightly above 4%. It estimated the current energy shock at roughly a third of the size of the 2022 shock. That implies about 50 basis points of tightening under a simple scaling exercise, compared with the 515 basis points delivered during the 2022 hiking cycle. The bank said its case for further hikes would weaken if energy prices fell sharply in coming weeks.
Source: Investing.com
Trading involves risk.
Risk Disclaimer
