Inflation fight focus raises hike risks – Deutsche Bank

Deutsche Bank’s Sanjay Raja notes the Bank of England (BoE) kept Bank Rate unchanged but clearly signalled a stronger focus on inflation risks. The Monetary Policy Committee (MPC) dropped its easing bias and stressed readiness to act if inflation expectations rise. Raja notes that persistent conflict in Iran and elevated energy prices could force rate hikes, making previous expectations for rate cuts unlikely in coming quarters.

BoE holds but signals hawkish readiness

“The message from the BoE today was clear: the MPC will act to guard against rising inflation expectations should it lead to more persistent price pressures. While there was no change in Bank Rate, the committee was unified in its decision to ‘wait-and-see’ how the Iran conflict evolved before rushing into any rate moves.”

“What’s the key line to take away today? ‘All members stood ready to act as necessary to ensure that CPI inflation remained on track to meet the 2% target in the medium term.’ The MPC refrained from maintaining an easing bias today.”

“Should energy prices stick at current levels, the MPC could be forced into pushing rates higher to curb inflation (which Bank staff now see tracking between 3-3.5% over the coming quarters). “

“Should we now be talking about rate hikes? The probability of hikes will have risen meaningfully following today’s decision with all members noting that they will know more by the April decision.”

“In some way, this is the new and important benchmark. If we get no clarity or resolution on the war, we will likely see a pivot in policy. Put simply, rate hikes are now a real risk for the economy.”

“There is now a lot of pressure for fiscal policy to respond to guard against rate hikes. Chancellor Reeves’ timeline to respond has been shortened. And the prospect of rate cuts now seems like a distant memory – at least for the coming quarters.”

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