BoE: Inflation forecasts suggest the peak in the rate might be much lower than the 1.50% currently priced in – Rabobank

The Bank of England announced on Thursday it rose the key interest rate by 25 basis points as expected. Four members of the Monetary Policy Committee (MPC) voted for a 50 bps increase. Analysts at Rabobank, point out the medium-term inflation forecasts suggest the peak in the key rate might be much lower than the 1.50% the market is currently pricing. They forecast another 25 bps rate increase as soon as the next meeting.

Key Quotes: 

“After bottling a widely expected rate increase in November and then defying the risks of Omicron when it pressed ahead with a 15 bps increase in December, the Bank of England MPC finally conformed to market expectations. But only just: the vote to raise the Bank rate to 0.50% was split 5-to-4. Policy makers Haskel, Mann, Ramsden and Saunders instead voted for a 50 bps increase, giving the MPC a bit more bang for the buck. Traders pulled forward bets on future rate increases: the market currently expects Bank rate to reach 1.00% in May.”

“We remain of the view that this tightening cycle is going to be more limited than what is currently priced in front-end rates and don’t expect the Bank of England to be able to match the Fed’s hiking pace this year or next. That said, the newfound hawkishness on the part of the Fed may provide the central bank with some cover. We forecast another 25 bps rate increase as soon as next meeting, before the MPC may decide it’s best to take a pause and re-assess.”