Morgan Stanley, BofA raise Bank of England terminal rate forecasts

Morgan Stanley and Bank of America now expect one more interest hike from the Bank of England next month, after the British central bank said it would “stay the course” following a quarter percentage point raise.

The BoE on Thursday delivered its twelfth consecutive hike, taking its key interest rate to 4.5%, as it seeks to curb the highest inflation of any major economy.

BofA Global Research, which expected a pause next month, now sees a 25 basis points (bps) increase, lifting its terminal rate forecast for the BoE to 4.75%. Morgan Stanley sees risks of wages growing more than the central bank’s forecast and introduced expectations for another 25 bps hike from the BoE in June, which they expect to be the final tightening of the cycle.

“At market-implied rates, the terminal mean forecast (for inflation) is just at 2% – which can be interpreted as a validation of the Bank Rate peak at 4.75%,” Morgan Stanley economists and strategists said in a note.

They expect the BoE to signal a “prolonged” hold in August, and reiterated their expectations for 150 bps worth of cuts in 2024.

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