Barclays Raise Bank Rate Forecasts, see 50bp Hike as Now Likely in August

Image © Adobe Stock

Economists at Barclays have raised their forecasts for the scale of interest rate rises to come from the Bank of England.

Having assessed incoming UK data and signals from the Bank of England, Barclays' UK economic team say a 50bp hike is now likely on August 04.

"We have always been cautious on Bank Rates putting a lot of faith in the “early and gradual” strategy of the MPC. But now we think there is a case to act more forcefully," says a note from Fabrice Montagné, Chief UK Economist at Barclays, dated July 26.

"In particular, surging energy prices are feeding into our forecast of the Ofgem price cap and will force the BoE to revise up its inflation forecast yet again. Higher inflation for even longer is the kind of scenario that spooks CB because of higher risks of persistence and spill overs," he adds.

Bank of England Governor Andrew Bailey has hinted at the prospect of breaking the Bank's favoured approach of hiking in 25bp increments.

"A 50 basis point increase will be among the choices on the table when we next meet," Bailey told guests at the annual Mansion House dinner.

"We note a somewhat more hawkish tilt from governor Bailey," says Montagné.

Barclays meanwhile note UK data is proving "fairly resilient data across the board," suggesting the economy is "cooling but not crashing".

The S&P Global PMI series for July showed the Composite PMI read at 52.8, beating an estimate for 52.5 but still coming in below June's 53.7.

S&P Global, who compile the PMI data, said although business activity at UK private sector companies increased for the seventeenth month running in July, the rate of expansion was the weakest over this period.

The slowdown in output growth mostly reflected softer demand, alongside ongoing capacity constraints arising from shortages of materials and staff.

"On a more positive note, latest data indicated that input cost inflation eased considerably since June and was the lowest for ten months," said S&P Global.

Barclays now expect a 50bp hike in August followed by a 25bp in September, taking Bank Rate to 2%, where it will stay.

Economists at Berenberg Bank meanwhile say the Bank will raise rates by 50bp in successive meetings.

"Following the signal from Bailey ... we now think that 50bp steps are the most likely outcome at both the 4 August and 15 September meetings (up from 25bp each before)," says Kallum Pickering, Senior Economist at Berenberg.

Bailey's Mansion House speech came the day before the ONS reported UK inflation read at 9.4% year-on-year in June, ahead of the market's expected 9.3% and up on May's 9.1%.

This after prices rose 0.8% in the month to June, underscoring the Bank's communicated intention to act "forcefully".

Inflation is well above the Bank of England's 2.0% target and resonates with fears expressed by Bailey in his speech that "we see the balance of risks to inflation as on the upside".

Economists say inflation will almost certainly break the 10% barrier towards the end of the year.