BoE Expected to Hike Rates Modestly as Insurance Against Inflation

Deutsche Bank's UK economists have revised their forecast for the Bank of England (BoE) to expect two quarter-point rate hikes in November and February. Sanjay Raja and Maui Brennan argue that Bank Rate is already restrictive, inflation is largely driven by energy prices, and second-round effects are limited.

The BoE's Monetary Policy Committee (MPC) has room to maneuver, with most members considering Bank Rate above the neutral range. With Bank Rate at 3.75%, it is seen as already restrictive, unlike the European Central Bank which has only just reached its neutral rate range.

Taylor Rule estimates suggest a modest increase in Bank Rate, lying slightly above 4%. This implies that the BoE may embark on a modest tightening cycle as an insurance policy against second-round effects. However, if energy prices decline rapidly, the case for hikes may weaken.