Bank of England to Hike to "At Least" 5% says NatWest

Image © Adobe Stock

One of the UK's largest high street lenders says the recent rise in UK core inflation in April represents a "game-changer" moment for UK interest rates and the broader economic outlook.

"The sobering implication is that the BoE will probably need to engineer a recession in order to return inflation to target," says Ross Walker, Head of Global Economics and Chief UK Economist at NatWest.

Walker made the comments in a note following the release of official data revealing UK core inflation reached 6.8% year-on-year in April, up from 6.2% in March.

NatWest has subsequently raised its forecasts for Bank Rate and the outlook for the UK's inflationary profile.

The latest data from the ONS showed that while headline CPI inflation fell below double digits, it remained significantly higher than market expectations.

Headline CPI stood at 8.7%, surpassing the anticipated reading of 8.3% and even exceeding the Bank of England's own forecast of 8.4%.

These elevated inflation figures indicate that price pressures continue to persist and pose significant hurdles for the central bank.

In response to these developments, market pricing reflects growing anticipation of further interest rate hikes by the Bank of England.

Investors now expect up to 90 basis points of additional rate increases before the end of the year. This shift in market expectations reflects the recognition that monetary policy needs to respond decisively to address the persistent inflationary environment.

"April's surge in Core CPI inflation feels like a game-changer," says Walker, adding there is a need for a reassessment of the UK monetary policy stance.

Walker's previous inclination was that Bank Rate would be held at 4.5%.

NatWest has now revised its forecast, expecting the Bank of England to implement further rate hikes in the near future.

Its new projection includes a 25 basis points increase in June to 4.75% and another 25 basis points rise in August to 5.0%. There is even the potential for further upside risks, with the Bank Rate possibly reaching around 5.5% by November.

NatWest's inflation forecasts align with their revised outlook. They anticipate headline CPI to edge down to 8.5% in May from the previous 8.7%, while core inflation is expected to rise to 6.9%.

Furthermore, they forecast a fall in RPI inflation to 11.3% in May.