Deutsche Bank revised its Bank of England rate outlook, moving from a call of "no further increases" to forecasting two quarter‑point hikes in November and February. The change follows the September policy decision, which indicated the central bank's tolerance for elevated inflation is beginning to wane.
Economists described the anticipated increases as likely "insurance hikes" rather than the start of a sustained tightening cycle, noting that the overall outlook remains dependent on energy price developments. Governor Andrew Bailey said that almost all of the rise in consumer prices since the Middle East conflict began could be attributed to higher energy prices.
The Monetary Policy Committee’s voting split remained unchanged from July, with Huw Pill, Megan Greene and Catherine Mann backing a rate increase, while the MPC left its broader guidance unchanged. UK inflation rose to just over 3% year‑on‑year in August, and Deutsche Bank expects inflation to reach around 4% by year‑end, with headline inflation at 3.1% versus core inflation at 2.6%.
The September minutes characterised the economy as only "somewhat more resilient" despite growth running at close to a 2.5% annualised pace, described the labour market as weak with spare capacity still present, and noted that most MPC members judged financial conditions were already providing a broadly sufficient degree of monetary restraint. The minutes also pointed to limited signs of second‑round effects in firms' price expectations, wage expectations and early 2027 pay settlements.
Using its Taylor Rule, Deutsche Bank estimates the appropriate policy rate is only slightly above 4%. The bank assesses the current energy shock at roughly a third of the size of the 2022 shock, implying about 50 basis points of tightening under a simple scaling exercise, compared with the 515 basis points delivered during the 2022 hiking cycle.
