Goldman Sachs expects two 100 basis point BoE hikes before end of 2022

(Alliance News) - Goldman Sachs on Tuesday predicted a pair of 100 basis point rate hikes from the Bank of England before the end of this year, with UK fiscal measures expected to heap more inflationary pressure.

The US investment bank expects Threadneedle Street to up the ante with two full percentage point rate hikes in November and December.

The BoE next announces an interest rate decision on November 3, before another one on December 15.

Speculation of an emergency rate hike by the bank this week gathered some pace on Monday, following the UK government tax and spending plans unveiled last week.

Governor Andrew Bailey, however, ruled this out. He said the bank's monetary policy committee will make a full assessment of the impact on inflation and the fall in sterling, at its next scheduled meeting in November and then "act accordingly".

Last week, the BoE enacted its second-successive 50 basis point hike, lifting rates to 2.25%. The half-point lift was the joint-chunkiest since 1995. A rise of a full percentage point would tower over that, however.

At last week's meeting, there were signs the MPC is growing more divided. Five members backed a 50bp hike, though three members, Jonathan Haskel, Catherine Mann and Dave Ramsden, wanted a stronger 75bp rate rise. In addition, Swati Dhingra preferred a 25bp hike.

Governor Bailey, Ben Broadbent, Jon Cunliffe, Huw Pill, and Silvana Tenreyro voted in favour of the 50bp rate rise.

Still, Goldman Sachs expects the BoE to turn the screw with chunkier rate hikes before the end of the year.

"Given more persistent inflation, we now expect the BoE to deliver a 100bp hike in each November and December (vs 75bp before), taking the terminal bank rate to 5% (vs 4.5%)," analysts at the investment bank predict.

The BoE will act more strongly in a bid to tame inflation. Goldman Sachs lifted its UK core inflation outlook to 3.3% by the end of 2023, from 2.7% previously, and 2.2% in 2024, up from the previous 2.1% forecast.

Goldman's inflation outlook bumps follows the UK mini-budget, which was presented last week.

On Friday, the UK chancellor announced a "permanent" cut to stamp duty and a reversal of tax hikes as part of plans to usher in a growth-focused "new era" for the country.

During Friday's 'fiscal event', Kwasi Kwarteng abolished the top rate of income tax for the highest earners, as he spent tens of billions of pounds to drive up growth amid a cost-of-living crisis.

From April, the 629,000 people on more than GBP150,000 a year will no longer pay the top income tax rate of 45% and will instead pay the 40% applicable to those on over GBP50,271. Kwarteng also brought forward the planned cut to the basic rate of income tax to 19p in the pound a year early to April.

Kwarteng failed to win the market's confidence, with the pound sinking to a record low of USD1.0349 on Monday morning.

On Tuesday afternoon, the pound fetched USD1.0802.

The UK government has since moved to calm unnerved currency markets, announcing it will now publish a "medium-term fiscal plan" in November, the announcement pushed forward from the year-end.

By Eric Cunha; [email protected]

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