Hawkish Bank of England hikes rates, and there’s more to come

The Bank of England is likely to raise rates once more by February, while the timing depends on energy prices and evidence of second-round inflation effects.

• The Bank raised rates from 3.75% to 4%, with all committee members voting for a hike, including the two previously identified as doves.
• The Bank expects inflation to peak at 4.9%, above ING’s forecast and most other economists’ predictions.
• Inflation is being driven mainly by energy prices, while services inflation is expected to remain broadly flat through March, limiting evidence of domestic price pressure.
• The Bank’s decision was prompted by upside risks, including the possibility that companies’ energy hedges and fixed-price contracts will expire and pass higher costs into prices.
• ING expects a cooling labour market, tight fiscal policy and restrictive rates to reduce the risk of second-round effects compared with 2022, with the April CPI report due in May as a key test.

Takeaway: ING expects 50 basis points of further tightening in total, with a December hike possible if the Middle East crisis pushes energy prices higher, and sees cuts beginning in late 2027 or early 2028 if inflation risks fade.