Bank of America expects the Bank of England to hold interest rates steady at 3.75% at its meeting next week, citing continued uncertainty over the duration of the recent conflict and its impact on energy prices and economic growth.
The bank expects a 7-2 vote in favor of maintaining interest rates, while Pell and Green will vote in favor of raising rates, although an 8-1 vote is likely. In a note on Thursday, Bank of America analysts said it was too early for the Bank of England to have enough evidence to act in response to the energy shock.
Comments from Bank of England Governor Bailey suggesting he is in no rush to raise interest rates suggest the barrier to a rate hike in April is high, according to the report. Energy prices have fallen from their recent highs, which is also likely to reduce the urgency for action.
Bank of America expects the Bank of England to emphasize a wait-and-see approach as it gathers more evidence about the economic impact of the conflict.
The data since the March meeting has been somewhat optimistic. February GDP was stronger than expected, and the unemployment rate fell to 4.9% in March from 5.2%, below the Bank of England’s forecast of 5.2%. Inflation rose to 3.3% in March, with services inflation rising to 4.5%.
April PMIs showed renewed growth momentum, but input costs rose at the fastest pace since November 2022, and output price inflation reached the highest level since February 2023. Short-term household inflation expectations jumped from 3.3% to 5.4% in March, the highest level since 2023, according to YouGov/Citi data.
On the cautious side, private sector wage growth fell to 3.2%, below the Bank of England’s forecast of 3.5%, and gas prices also fell modestly from mid-March levels.
Bank of America expects the Bank of England to maintain 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 judgments on whether increases are likely, given the uncertainty, but expects to keep the door open for modest increases if energy prices remain high.
Bank of America expects to raise rates twice in June and July, with one risk, calling it a close call given growth concerns and the Bank of England’s messaging. The bank then expects three quarterly cuts from the second quarter of 2027 to 3.5%.
The ceasefire is likely to increase the risk of one increase instead of two and the risk of previous cuts in 2027, according to the report.
Source: Investing.com
