Proactive Investors - After yesterday's weak PMI figures, Goldman Sachs (NYSE:GS) expects two more interest rate rises by the Bank of England, reaching a peak of 5.75%.
Goldman's Sven Jari Stehn predicts a 25 basis point (bp) rise at the next meeting on 21 September and one further increase in November.
"Given mixed progress on the BoE’s watchlist with weak labour market activity, strong wages and slightly firmer services inflation - similar to the split verdict in the run-up to the August meeting - we expect a further 25bp hike," he said.
He thinks a 50bp move would likely require notable upside surprises across all indicators, including labour market activity but given the weakness in employment and the flash PMI "we therefore see a very high hurdle for a 50bp move in September."
Stehn believes that further tightening is probably needed to slow labour demand sufficiently to cool wage growth to 3% and therefore predicts another 25bp hike in November for a peak Bank Rate of 5.75%, "somewhat below market pricing."
He then expects the Monetary Policy Committee to maintain the peak rate for an extended period to keep policy sufficiently restrictive with the first cut in the third quarter of 2024.
"We therefore view a range of 5.5%-6.0% as reasonable for the terminal rate, with market pricing clustering towards the upper end," he added.