The Bank of England will hike interest rates at its next meeting in late April, JP Morgan has predicted, presenting a new threat to the security of the UK economy.
JP Morgan economist Allan Monks has said that the Bank’s Monetary Policy Committee (MPC) will opt to raise interest rates at least twice this year.
The Wall Street bank’s UK economist said interest rates would be left at 4.25 per cent by July, up from its current level of 3.75 per cent.
“If the Bank is to hike, we think it would be more natural to do so in April which is a forecast meeting,” Monks said.
“If the MPC’s inclination is to hike, and its revised inflation profile is starting to be validated by then, it’s not clear why it should wait any further.”
He added that the Bank would have “ample room” to cut interest rates quickly if the risk of a recession materialised.
Forecast revisions by the JP Morgan suggested two per cent inflation would only be reached in spring 2027 while interest rates would only drop back to 3.75 per cent in a year’s time.
After the MPC noted it was “ready to act” to change interest rates in response to soaring prices, markets sold government bonds en masse.
The two-year gilt yield hit 4.5 per cent on Monday, suggesting that markets are now pricing in three interest rate hikes.
Interest rate cuts ‘not on the horizon’
The change in predictions set by bond trader and City economists are likely to unsettle Rachel Reeves and Keir Starmer. Ministers will have to weigh up heavier pressures on government borrowing costs with political demands for a multi-billion pound household energy support package to be unveiled.
Senior Labour officials have raised questions about Reeves’ fiscal rules as calls for greater borrowing have grown.
The government has called for the US and Israel to come to a negotiated settlement with Iran amid fears that strikes on key gas and oil producers in the region could worsen the UK’s economic outlook.
On Thursday evening, governor Andrew Bailey attempted to play down the prospect of interest rates being hiked as he said the UK economy was in a different position to 2022 when Russia launched its full-scale invasion of Ukraine.
The energy price shock in 2022 led to interest rates being raised from 0.5 per cent to 5.25 per cent over the course of 18 months, with CPI inflation peaking at 11 per cent.
Policymakers were then worried about higher wage growth forcing companies to push up prices.
Official data on Thursday morning showed that the unemployment rate remained at 5.2 per cent, vacancies dropped in the three months to February and wage growth cooled by more than expected.
Though Bailey suggested interest rate cuts were “not on the horizon”, he said that inflation had been coming down as a result of a “weakening of demand” in the UK economy due to erosion in the jobs markets.
“The longer it goes on, I’m afraid to say but it is rather an obvious point, the effect will be larger,” Bailey told LBC.
“I think that’s why it’s imperative that – as I know the government is doing – that everything is done that can be done to alleviate this.”
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