City economists say financial markets are wrong to price in Bank of England rate rises of a full percentage point or more by next summer. They argue a sharp tightening cycle is unlikely. The bank rate stands at 3.75 percent today.
Market-implied expectations put the bank rate at 4.75 percent by the end of July next year. Some pricing reaches 5 percent by December 2027. Those expectations are derived from instruments including swaps and have moved closely with oil prices since the Iran war began.
Forecasters take a different view
James Smith, developed markets economist at ING, said the swaps market prices four rate hikes and then no cuts ever, which few would agree with. He thinks the Bank could sound the all clear by next spring and cut rates by the end of next year.
Sanjay Raja, chief UK economist at Deutsche Bank, said no mainstream forecaster thinks the Bank will hike to 5 percent by the end of next year on current information. It is not impossible, he said, but on current projections it seems less likely. His base case has the bank rate reaching 4.25 percent by next February.
Oxford Economics forecasts a 25 basis point rise at both the November and February meetings, with the bank rate at 4.25 percent. Goldman Sachs said its probability-weighted path remained notably below market pricing but expects a rise to 4 percent next month.
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What could change the outlook
Morgan Stanley’s base case is rises in November and February, then a hold. A larger-than-expected national living wage increase from the Low Pay Commission could add pressure to raise rates.
Huw Pill, the Bank’s chief economist, told an IMF meeting in Bangkok this month he was sceptical the Bank would need four rises over the next year. UK inflation was 3.5 percent in September.
Related: BoE's Greene urges Bank Rate hike amid GBP/USD bounce
