Goldman Sachs has revised its estimate of the peak U.K. interest rate, while still projecting a quarter-point increase by the Bank of England on Thursday.
Economists James Moberly and Sven Jari Stehn believe that the U.K. central bank will raise rates to 5.5%, up from 5.25%. However, they no longer anticipate an additional rate hike in November.
Factors to Consider
Moberly and Stehn point out that since the August meeting, the unemployment rate has continued to rise. In addition, communication from core members of the Bank of England has consistently indicated a dovish stance. Notably, Bank of England governor Andrew Bailey mentioned that interest rates are approaching the top of the cycle.
Despite these dovish indicators, not all recent developments have been negative. The latest private sector pay numbers exceeded the Bank of England's forecasts.
Inflation Data to Analyze
The Bank of England will examine the most recent inflation data, which will be published on Wednesday, to inform its decision-making process. The Goldman team predicts services inflation to be at 7.3% year-over-year, slightly higher than the Bank of England's projection.
Looking to November
The Goldman team believes that the Bank of England will likely refrain from further rate increases until there are clearer signs of cooling in wages and services inflation. They emphasize the importance of wage growth and services inflation figures for August and September.
The yield on the 2-year gilt BX:TMBMKGB-02Y remained steady at 4.77% and has risen by 1.2 percentage points this year.
Meanwhile, the pound (GBPUSD, +0.08%) was trading just below $1.24, after reaching above $1.27 in late August.