BoE Seen Hiking Rates Modestly as Insurance Against Inflation

Deutsche Bank Research's UK economists Sanjay Raja and Maui Brennan have revised their base case for Bank of England (BoE) interest rate hikes. They now expect two 25 basis point increases, one in November and another in February.

The economists argue that Bank Rate is already restrictive, with many centrist Monetary Policy Committee (MPC) members believing it to be above the neutral range. At its current level of 3.75%, they believe there's room for the MPC to tighten policy without causing significant economic harm.

Raja and Brennan point out that their Taylor Rule estimates suggest only a modest increase in Bank Rate, lying just above 4%. This implies that even with higher-than-expected GDP growth and inflation, the BoE may not need to aggressively hike rates.