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VIEW CHANGE: BofA: BOE wants to stop hiking at first opportunity; 5.50% terminal

BOE
  • “The BoE seems to be hoping that higher for longer rates will work, rather than the alternative of hiking enough to create a downturn and cut inflation quickly. They prefer higher for longer probably in part because it may run fewer financial stability risks.”
  • “We disagree with the BoE's arguments. Simultaneous upside wage and inflation surprises in our view indicate an entrenched inflation problem.”
  • “Clearly the BoE wants to keep its options open, is not required to always guide the market, and its bias is to stop hiking at the first opportunity. Therefore, we forecast the BoE to stop hiking after September and to hike 25bp in August.”
  • “We maintain our call for two more 25bp rate hikes (August and September) and raise terminal as a result to 5.5% from 5.25%. Given the BoE's seeming preference for higher for longer combined with our view that the entrenched inflation problem is worsening, we remove the rate cut we previously expected in 2024.”
  • “We see risks skewed to higher terminal, a recession and more cuts and cannot rule out that the BoE may pause hikes later this year only to hike further in the new year as inflation proves more stubborn than they expect.”
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