Morgan Stanley has adjusted its outlook for the Bank of England’s monetary policy, now projecting two 25-basis-point rate hikes—one in November and another in February—reflecting a fiscal environment that restricts the central bank’s ability to respond aggressively to inflationary pressures. The revision comes amid a U.K. government deficit of around 4% of GDP, comprising a primary deficit of roughly 1% and debt servicing costs absorbing about 3%, according to the firm’s analysis. With fiscal headroom estimated at £8 billion, the Bank of England faces constraints in deploying additional monetary stimulus without risking further fiscal strain.
The updated forecast follows a September meeting where Deputy Governor Lombardelli emphasized a balanced approach, though economists noted that a more aggressive hiking cycle would require a material fiscal loosening or a Budget that prioritizes inflation-fighting measures. Morgan Stanley estimates that higher inflation alone could push day-to-day spending up by £5 billion, while revenue-raising measures—without additional spending cuts—could lift the budget surplus toward £15 billion. The firm’s models suggest that between £10 billion and £15 billion in tax or spending adjustments would be needed to achieve that target.
The revised expectations also reflect the market’s pricing of about 100 basis points into the front end of the U.K. yield curve, indicating a degree of anticipation for further tightening. The Bank of England’s Monetary Policy Committee remains under scrutiny as it balances inflation control against fiscal discipline, with analysts monitoring whether upcoming fiscal announcements will provide clearer guidance on the central bank’s policy stance.
