Stagflation may require rate hikes to 3% and cuts thereafter

While raising interest rates by 50 basis points (bps) today, from 1.25% to 1.75%, the Monetary Policy Committee (MPC) suggested that rates will probably have to rise further to knock on the head the recent rises in price/wage expectations, but that a painful recession will probably mean that rate cuts will be required further ahead. The latter explains today’s falls in gilt yields and the pound. We think rates will rise to a peak of 3.00% and stay there in 2023 and well into 2024. The risk is that rates are cut sooner. Bank of England Drop-In (4^th August, 10:30 ET/15:30 BST): Join our post-MPC, 20-minute online briefing to find out why we think UK rates will rise by more than most expect, despite a looming recession. Register now.