BoE to raise rates by 50 basis points at September meeting – Goldman Sachs

The Goldman Sachs economists, in their latest note, maintain the opinion of a 50 basis point rate hike by the Bank of England (BoE) in its September monetary policy decisionwhile revising upwards their forecasts for a rise of 50 basis points in the coming months.

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“In the run-up to the September meeting, the Monetary Policy Committee is likely to focus on the extent to which strong wage growth is taking hold, and in assessing the reaction of inflation expectations to high spot inflation. The UK labor market remains remarkably strong, with many indicators as tight as in the US. Household inflation expectations have tightened considerably, and we believe that risks tilt towards more persistent inflation expectations.”

“Although it is not a fact, we still think that a 50 basis point hike at the Monetary Policy Committee meeting in September is more likely than a hike to 75 basis points. That said, given persistently strong wage growth, elevated inflation expectations, and the likelihood that the new PM will announce more fiscal support, there is a case for the BoE to move monetary policy quickly into contractionary territory. “

“In the wake of firmer inflation prospects, we revised our interest rate forecasts to include hikes of 50 basis points at the Monetary Policy Committee meetings in November and December (versus 25 basis points previously), which would take the bank interest rate to 3.25% by the end of the year. After this, we expect a taper to a 25 basis point rise in February as we expect data to show the UK economy is in the midst of a technical recession at the time. This puts our terminal bank rate at 3.50%, up from 2.75% previously, but below market prices.”