Bank of America forecasts no rate cuts for UK until 2025 due to 'entrenched inflation'
BofA forecast the Bank of England will opt for a 25bps hike in September to 5.5%.
In a research note today (1 September), UK economist Robert Wood said the UK has an «entrenched inflation problem», which has been caused by four supply shocks: energy prices, supply chains, Brexit and workforce sickness.
The weak supply has bled into the UK's growth prospects, as there has been no actual growth since 2019, leading to a strong domestic inflationary pressure.
Wood explained inflation pressure is now «entrenched to a degree, as the structural economic changes combined with high inflation have modestly deanchored inflation expectations».
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As a result, the economist has forecast the Bank of England will hike rates by 25bps in September to 5.5%, which he expects the central bank will hold at the same level through 2024.
Wood added the sharp drops in the Services Purchasing Mangers' index (PMI) and the Confederation of British Industry (CBI) retail survey show UK growth is weakening. Yet he noted the PMI has not been a «good guide» lately, as it may exaggerate the slowdown.
On the back of this, BofA expects 0.4% quarter-on-quarter growth in Q3, helped by the bounce back of the extra bank holiday in May, and 0% in Q4. The bank also revised its forecast for the year to 0.6% from 0.4% for the UK, due to real wage growth «soon turning positive».
This was also caused by a faster-than-expected easing of the UK labour market, Wood highlighted, prompted by the one-off supply improvement from students returning to work. But the «chronic» labour supply problem of increased workforce sickness remains, he added.
Bank of America predicts one more hike from Bank of England and ECB
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