US investment bank Goldman Sachs has raised its forecast for peak Bank of England Base Rates to reach five percent in August, citing stronger-than-expected activity in Britain’s economy.
The Bank of England Base Rate currently sits at 4.25 percent and according to Reuters, investors in interest rate futures are putting a roughly 90 percent chance on an increase to 4.5 percent on May 11 after its next scheduled Base Rate meeting.
But this rate is only expected to increase during the summer, with analysts predicting a 0.5 percent hike to further stem the UK’s staggering double-digit inflation rate.
According to Pound Sterling Live, Sven Jari Stehn, chief Europe economist at Goldman Sachs said in a late April research briefing: “It is possible that the Monetary Policy Committee (MPC) might want to slow the hiking to a quarterly pace, but we are sceptical that this will be feasible given ongoing inflation pressures.”
“We do not look for renewed forward guidance at the May meeting—retaining data dependence—but we believe that it will be difficult for the BoE to stop tightening in light of the firm data and we look for two further 25 basis points steps in June and August.”
UK inflation fell from 10.4 percent to 10.1 percent in March, a modest drop as food and drink price growth remains at a 45-year high of 19.2 percent.
Goldman Sachs said that although UK inflation was on track to fall rapidly with help from easing global energy prices, the measure for the rising cost of living was unlikely to drop enough to meet the Bank’s two percent target set by the Government.
They also warned of a likely significant impact on the economy late this year and throughout the next as mortgage interest rates are reset to higher levels in response.
Mr Stehn said that the Bank of England’s policy tightening will weigh significantly on activity.
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He said: “We estimate that the 415 basis points of Bank Rate hikes delivered so far will cumulatively lower real GDP by close to three percent by the end of 2023 and four percent by the end of next year, with the majority of the drag still to come.”
He continued: “That said, our modelling suggests that the growth drag from the BoE’s tightening is likely to peak in [quarter two] and that sharply lower gas prices are likely to provide significant relief to cost of living pressures in [the second half of the year].”
Central banks across the globe have been raising borrowing costs to tackle soaring inflation after the Covid pandemic and the impact of Russia’s war in Ukraine.
The head of the European Central Bank, Christine Lagarde, warned last week that it had “more ground to cover” after raising rates to 3.25 percent. The US Federal Reserve recently raised rates from five percent to 5.25 percent.
However, Britain’s economy has outperformed expectations in recent months as consumer spending remains robust despite the cost of living crisis.
Mr Stehn added: “We estimate that seasonally adjusted sequential core inflation moderated to 0.5 percent month on month (from 0.8 percent in February), but this remains above the pace observed in quarter four and notably stronger than underlying price pressures in the US and Euro area.”
Core inflation refers to the change in the costs of goods and services but does not include those from the food and energy sectors.
Mr Stehn continued: “But we estimate that services inflation will remain sticky due to strong wage growth. We, therefore, lifted our end-2023 core inflation forecast to 4.7 percent (from 4.3 percent) and still see core inflation at 2.9 percent at the end of 2024, notably above our expectations for core inflation in the US and the Euro area.”
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