Bank of England: Moderate Insurance-Style Tightening Path – Deutsche Bank

Deutsche Bank Research UK economists Sanjay Raja and Maui Brennan have updated their assessment of the Bank of England's monetary policy path, adjusting the base case from no further rate hikes to 25 basis point increases in both November and February. This adjustment implies that the bank expects the BoE to adopt a "moderate insurance-style tightening" over the next two meetings, rather than aggressive tightening.

**Rates Already Restrictive, Policy Stance Cautious**

The Deutsche Bank economists believe that the current bank rate level is already in restrictive territory, reducing the need for significant further hikes. They note that UK inflation is primarily driven by energy prices rather than broad domestic demand overheating, so monetary policy must weigh the marginal impact of further tightening on the economy. Based on the latest decision, the BoE held the benchmark rate at 3.75%, consistent with Deutsche Bank's assessment and market expectations, indicating policymakers maintain a cautious balance between inflation and growth.

**Limited Second-Round Effects Support Gradual Path**

The Deutsche Bank team emphasizes that despite elevated inflation readings, the second-round effects of a wage-price spiral remain limited. This suggests inflationary pressures are more the result of supply-side shocks rather than sustained demand-side overheating. Based on this assessment, they believe the BoE does not need to pursue a steeper rate hike path, and that "insurance-style" adjustments of 25 basis points each in November and February should suffice to address potential inflation stickiness risks.

**Market Impact and Key Watch Points**

If Deutsche Bank's expectations materialize, the BoE will initiate rate hikes in November and continue with another in February next year, gradually lifting the bank rate from its current 3.75%. Markets will closely monitor energy price trends and labor market data in the coming months to verify whether second-round effects remain moderate. According to Deutsche Bank's analysis, as long as inflation shows no signs of broad domestic demand-driven pressures, the BoE's tightening pace is likely to remain gradual.