The Bank of England will raise interest rates to four per cent by the end of the year, a top Wall Street bank has warned.
Goldman Sachs has upgraded its interest rate expectations amid concerns that inflation could jump higher than previously expected.
The bank said an interest rate hike this year was more likely as it revised up its inflation forecast for the beginning of 2027 to 3.9 per cent. A previous forecast suggested inflation would peak at 3.3 per cent later this year.
The forecast update reflects growing beliefs that interest rates will rise in order to squeeze inflationary pressures building in the UK economy as a result of the energy price shock caused by the Iran war. Two-year gilt yields suggest there could be as many four interest rate hikes on the horizon although top City economists’ predictions have generally not matched market pricing.
City analysts believe CPI inflation will edge up to 3.1 per cent when the Office for National Statistics publishes fresh data for the period of 12 months leading up to August.
Economists at Goldman Sachs predicted that the Bank’s Monetary Policy Committee would raise interest rates to four per cent in November, citing the risks of “persistently higher” oil and gas prices across international markets.
However, the bank’s forecasters held that rates would be kept at 3.75 per cent when the MPC meets this Thursday. As many as four Bank officials out of the nine-strong MPC could demand higher borrowing rates due to concerns over rising energy prices.
Goldman Sachs economists James Moberly and Sven Jari Stehn said there was “some risk” that the MPC signals an upcoming tightening in monetary policy later this week.
Minutes from the Bank’s next meeting could indicate that price pressures driven by higher wage growth have intensified, analysts said.
“Recent weeks have seen significant increases in wholesale energy prices, a larger rise in headline inflation than the Bank had expected, and strong growth data,” Moberly and Jari Stehn warned clients in a note. “Governor Andrew Bailey has continued to note upside risks to the policy path given energy price pressures but has not signalled that a hike is imminent.”
City banks split on interest rates
Most City economists believe the Bank will leave interest rates unchanged this week.
Deutsche bank analysts said they believed the MPC’s “patience may be running thin” as resilience in growth might add to “nervousness” among policymakers around higher inflation.
Yet ING’s James Smith suggested the Bank of England may surprise traders by being less hawkish than widely predicted.
It said there was “very little sign” that higher oil and gas prices were “broadening out to the wider inflation basket” while there were “valid reasons” to believe energy prices would come down by November.
He said: “All the models will tell you that you’re unlikely to see the peak impact of higher energy prices on these categories for 12 to 18 months. But we should be seeing something already – and we’re not.”