Some investment banks have brought forward their forecasts for the Bank of England‘s next interest rates hike to the November meeting.
Following the speech on Sunday by BoE governor Andrew Bailey that the bank “will have to act” to rein in inflation, Goldman Sachs (NYSE:GS) said on Monday that it now expects interest rates to be raised at the 4 November meeting of the monetary policy committee.
Likewise, ING economist James Smith said: “It’s a close call between a November and February move, but we suggest the former is more consistent with the governor’s latest hints.”
Smith added that the rapid succession of rate hikes being priced by the market “looks too extreme”, and more likely next year will see one further hike to take the Bank rate to 0.5%, followed by the start of balance sheet reduction.
“We may even see the BoE hint at this in its November forecasts. Policymakers plug in market-rate expectations into the forecasts, and if the steeper yield curve means inflation is projected to be below target in 2-3 years, it would be an implicit hint that investors are jumping the gun.”
Interest rate markets were recently suggesting an 85% chance of a rate rise before the end of 2021, and a 60% chance of a hike at the next MPC meeting in November, while yields on two-year Gilts climbed to their highest level in over two years.
While the words from Bailey and some colleagues in recent days seems to suggest a significant shift in the Bank’s intentions, there may yet be some prevailing factors which push an interest rate rise into next year, said analyst Laith Khalaf at AJ Bell.
“The Bank’s rate setters will want to see what the economy looks like after the sticking plaster of furlough has been properly removed, and how much legs the energy price crunch has left. The Bank may well be wary that rising energy costs will act as a brake on economic growth, which will do a similar job to an interest rate hike, thereby alleviating the need for tighter policy just yet,” he said.
With all nine members of the MPC having unanimously voted to keep interest rates on hold less than a month ago, a rate rise in November “would require a pretty humbling collective shuffle across the aisle”, Khalaf added.