Bank of England: A Measured Pace of Rate Hikes – Rabobank

Higher market rates have already tightened financial conditions, but Rabobank strategist Stefan Koopman argues that the Bank of England’s (BoE) Monetary Policy Committee (MPC) must now deliver rate increases to validate market pricing. He expects a 7-2 vote to lift Bank Rate to 4.00% in November 2026, with a further 25bp increase to 4.25% in February 2027. The report views fiscal policy as providing only a modest counterweight to the inflation shock driven by energy prices.

Will the MPC ratify the tightening priced in by markets?

"We expect the Bank of England to raise Bank Rate by 25bp to 4.00% next week. We think the vote will be split 7-2, with doves Dhingra and Taylor preferring to keep rates unchanged."

"We therefore add another 25bp hike to our forecasts, taking Bank Rate to 4.25%. That more or less would align Bank rate with spot inflation."

"Financial conditions are already doing some of the MPC’s work, giving it room to move gradually without looking complacent. By February, fresh forecasts will also give policymakers more information to go on."

"The overall fiscal stance is still slightly restrictive over the coming years. We continue to think that this will exert some downward pressure on Bank Rate over the longer run."

"More hikes could still be needed. But by late Q1, the calculus may shift again: even if oil prices remain elevated, as we forecast, a credible prospect of de-escalation in the US-Iran conflict could be enough for the MPC to look through current inflation, essentially betting that the worst is behind it."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)