The Bank of England (BOE) is expected to raise its benchmark interest rate in response to inflationary pressures from rising energy prices, according to a forecast released on the 21st (local time) by Mitsubishi UFJ Financial Group (MUFG). MUFG Chief Economist Henry Cook projected in a report that the BOE will increase rates by 25 basis points at its next meeting and implement an additional hike in early next year, bringing the terminal rate to 4.25%. The forecast is driven by expectations that UK inflation pressures will persist longer than anticipated, with energy price increases passing through to household bills and headline consumer price inflation potentially exceeding 4% in the coming months.
MUFG Forecasts BOE 25bp Rate Hike at Next Meeting
MUFG expects the BOE to raise the benchmark rate by 25 basis points at its next meeting, followed by an additional 25bp increase in February of next year. This would bring the terminal rate to 4.25%. Henry Cook stated in the report that the BOE faces difficulty delaying monetary policy response as energy price increases may not remain a temporary shock.
Energy Prices Drive UK Inflation Above 4% Forecast
MUFG analyzed that UK inflationary pressures could persist longer than expected. The firm forecasts that headline consumer price inflation may exceed 4% within the coming months as rising energy costs are reflected in household bills. Core inflation remains elevated, according to MUFG's assessment.
Stable Labor Market and Economic Growth Support Rate Increase
MUFG diagnosed that the labor market shows signs of stabilization while economic growth remains solid, with core inflation still at high levels. The firm projected UK growth at 1.5% this year and 1.4% next year. Third-quarter GDP growth was estimated at 0.65% quarter-on-quarter. However, MUFG noted that growth momentum is concentrated in certain service sectors, which represents a constraint on the economic outlook.
Fiscal Concerns Contribute to UK Gilt Yield Rise
Rising UK government bond yields reflect not only monetary policy expectations but also fiscal concerns, as increased borrowing costs may reduce the government's fiscal maneuvering room. MUFG raised the possibility that the UK government's fiscal buffer has shrunk to approximately £15 billion. The report stated that hawkish BOE policy reassessment is a larger driver of gilt yield increases than fiscal concerns, diagnosing that "BOE's hawkish reassessment is a bigger driver than UK fiscal concerns."
FAQ
What did MUFG forecast for BOE interest rates?
MUFG Chief Economist Henry Cook forecasted on the 21st (local time) that the BOE will raise its benchmark rate by 25 basis points at its next meeting and implement an additional 25bp hike in February of next year, bringing the terminal rate to 4.25%.
Why does MUFG expect the BOE to raise rates?
MUFG expects rate increases due to rising energy prices causing inflationary pressures, with headline consumer price inflation potentially exceeding 4% in the coming months as energy costs pass through to household bills. The firm also cited stable labor market conditions, solid economic growth, and persistently elevated core inflation as supporting factors.
