(Bloomberg) --
The U.K.’s labor market recovery and inflationary pressures are strong enough for Goldman Sachs Inc. to expect the Bank of England to start a cycle of interest-rate hikes that will take borrowing costs to 1% in two years’ time.
The central bank will raise its benchmark rate from the current record low of 0.1% by 15 basis points in May next year, and will follow that by a quarter-point hike every two quarters, economists Steffan Ball and Nikola Dacic wrote in a report.
The U.S. bank’s previous forecast was for the first BOE move to come in the third quarter of 2023.
While many economists and investors agree that the central bank will tighten monetary policy as inflation gathers pace, Goldman’s new prediction is more hawkish than most. Forward-market indicators point to a cumulative 65-basis point increase by the fourth quarter of 2023.
“The recent data on the U.K. labor market have been stronger than expected, and indicators imply a smoother furlough unwind than we previously assumed,” Ball and Dacic wrote. “Our analysis suggests that underlying wage growth is strong and inflation pressures are firming more than anticipated.”
Data this week showed that the number of workers on U.K. company payrolls climbed above its pre-pandemic level as vacancies hit a record high with companies battling staff shortages created by Brexit and lockdowns.
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