BoE expected to hold rates as uncertainty persists, BofA says
Bank of America expects the Bank of England to keep the Bank Rate on hold at 3.75% at its meeting next week, citing ongoing uncertainty about the duration and impact of the recent conflict on energy prices and economic growth.
The bank forecasts a 7-2 vote for holding rates, with Pill and Greene voting for a hike, though an 8-1 outcome is possible. In a note on Thursday, Bank of America analysts said it is too soon for the BoE to have enough evidence to act in response to the energy shock.
Comments from BoE Governor Bailey indicating he is in no rush to raise rates suggest the bar for an April hike is high, according to the report. Energy prices have fallen from recent highs, which is also likely to reduce urgency for action.
Bank of America expects the BoE to emphasize a wait and see approach as it gathers more evidence on the conflict’s economic impact.
Data since the March meeting has been somewhat hawkish. February GDP was stronger than expected, and the unemployment rate dropped to 4.9% in March from 5.2%, below the BoE’s 5.2% forecast. Inflation rose to 3.3% in March, with services inflation climbing to 4.5%.
April PMIs showed renewed growth momentum, but input costs rose at the fastest pace since November 2022, and output price inflation hit the highest level since February 2023. Household short term inflation expectations jumped from 3.3% to 5.4% in March, the highest since 2023, according to YouGov/Citi data.
On the dovish side, private wage growth softened to 3.2%, below the BoE’s 3.5% forecast, and gas prices are modestly lower than mid-March levels.
Bank of America expects the BoE to keep its guidance that it stands ready to act as necessary to ensure inflation remains on track to meet the 2% target in the medium term. The bank does not expect strong judgements about whether hikes are likely, given uncertainty, but expects the door to remain open to modest hikes if energy prices stay elevated.
Bank of America forecasts two hikes in June and July, with risks of one, calling it a close call given growth concerns and BoE messaging. The bank then expects three quarterly cuts from Q2 2027 to 3.5%.
The ceasefire potentially increases the risk of one hike instead of two and the risk of earlier cuts in 2027, according to the report.
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