Bank of England: How is the energy shock shaping the rate path? – ING

Further Bank of England (BoE) rate rises in November and February are expected by ING’s James Smith as a precaution against second-round inflation effects, despite limited evidence that higher energy prices are feeding through more broadly. Smith forecasts that United Kingdom (UK) inflation will briefly touch 4% this winter, but believes policymakers may be more confident by spring that inflation risks are contained. That could open the way for rate cuts from November 2027 and into 2028.

Could BoE rate hikes give way to a gradual policy reversal?

"For the Bank of England, this poses a dilemma. While economic growth has been more resilient than feared, and the jobs market is stabilising, there’s very little evidence so far that the energy shock is spilling into other parts of the inflation basket. Nor is there much evidence that it will do so over the next few months."

"So when the Bank likely hikes rates in early November, it will be entirely for risk management reasons. The truth is it’s still early days and officials will want another few months of data before concluding that the storm has passed. In the meantime, headline inflation is likely to briefly peak at 4% this winter – something officials have historically argued tends to raise the risks of second-round effects."

"We’re less convinced. We expect hikes in both November and February, but by the spring, we think the Bank will be more confident in calling the ‘all clear’ on second-round effects."

"If we’re right, then we think the Bank can start cutting rates again by next November and into 2028."

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