Investors are increasingly forecasting that the Bank of England (BOE) may accept inflation levels over its official 2% target, as indicated by warnings from BNY Mellon (NYSE:BK) Investment Management and Bank of America (NYSE:BAC). This anticipation, mirrored in market indicators, could potentially jeopardize the central bank's credibility.
The Monetary Policy Committee (MPC) is predicted to maintain interest rates at a 15-year high of 5.25%, despite allegations of a delayed response to the post-pandemic surge in prices. The UK's current inflation rate stands at 6.7%, considerably higher than rates in the euro area and the US.
Despite BOE Governor Andrew Bailey and his team's commitments to bring inflation back to 2%, there is an escalating debate about modifying this target due to persistent high price increases. Robert Wood, a UK economist at Bank of America, stated that investors do not anticipate the BOE achieving its medium-term inflation target.
Long-term global interest rates are expected to stabilize between 4.5% to 5.5% due to stronger inflation, with the UK predicted to be at the higher end of this range. The BOE's "Table Mountain" profile suggests that rates will stay high for an extended period. The rising 5-year, 5-year inflation swap rate and rate-setters' concerns about enduring inflation risks signify doubts about the BOE's commitment to its target.
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