Test - Prompt V5 - 4% UK inflation this winter: banks see November and February Bank of England hikes

Institutional banks see UK inflation running hotter than expected and driving near-term Bank of England rate hikes in November and February. Nomura and ING both point to sticky or contained second-round effects alongside strong growth and energy-driven price pressures, while BBH focuses on market pricing, viewing a November move to 4.00% as largely assured but expecting less tightening than the swaps curve implies.

Nomura: Sticky inflation and growth prompt BoE hike forecast shift

Analysts at Nomura note that both headline and services inflation in the UK came in above consensus expectations in the September report, with the BoE’s core measure of service prices momentum described as having been “sticky over the past few months.” They link this persistence in inflation to a broader macro backdrop of “a resilient labour market, strong economic growth and persistently elevated energy prices.” On that basis, Nomura explains that this combination has led them to “change our view on the BoE.” They now “see rate hikes in November and February,” and emphasise that this path is “still a more dovish outcome than markets are pricing.”

"Nomura: Both headline and services inflation came in above consensus expectations in today’s September report. The BoE’s core measure service prices momentum has been sticky over the past few months."

BBH: November BoE hike seen done, but curve too hawkish

Strategists at BBH observe that GBP is up versus USD and EUR as “UK September CPI inflation ran hot,” and judge that “a 25bps BOE policy rate hike to 4.00% on November 5 is pretty much a done deal.” They also point out that “the swaps curve still implies 113bps of BOE tightening in the next twelve months,” which they regard as leaving “scope for less.” BBH cites several factors behind this view of limited additional tightening: “(i) The UK economy is operating below capacity, (ii) virtually no real wage growth constrains spending, (iii) the policy rate is near the top of the BOE’s estimated 2% to 4% neutral range, and (iv) fiscal policy will likely turn more restrictive following the October 28 UK budget.”

"Nomura: A combination of sticky inflation, a resilient labour market, strong economic growth and persistently elevated energy prices has led us to change our view on the BoE. We now see rate hikes in November and February, which is still a more dovish outcome than markets are pricing."

ING: Energy-driven 4% inflation with limited spillovers and BoE hikes

Economists at ING state that UK inflation is “on course to hit 4% this winter,” but add that “there's still very little sign that the rise in energy prices is spilling into other parts of the inflation basket.” In their view, “The Bank of England is set to hike rates in November and probably February too,” reflecting the current inflation trajectory. ING further clarifies that “We expect hikes in both November and February, but by the spring, we think the Bank will be more confident in calling the ‘all clear’ on second-round effects.” They therefore frame the upcoming tightening moves as occurring against a backdrop where second-round inflation dynamics remain contained.

"BBH: GBP is up versus USD and EUR. UK September CPI inflation ran hot. A 25bps BOE policy rate hike to 4.00% on November 5 is pretty much a done deal."

The takeaway

Nomura says sticky services inflation, a resilient labour market, strong growth and elevated energy prices lead them to expect BoE rate hikes in November and February. BBH expects a November move to 4.00% as nearly certain but sees less tightening than the swaps curve implies, while ING expects November and February hikes as inflation heads toward 4% this winter with limited second-round effects.