Sept 17 (Reuters) - J.P.Morgan expects the Bank of England to raise interest rates by 25 basis points in February, following the central bank's decision to keep borrowing costs on hold, but warns of further tightening if the Iran war continues.
The UK central bank's Monetary Policy Committee voted 6-3 to keep rates at 3.75% earlier on Thursday, but also predicted that inflation could top 4% early next year.
"It almost sounds as if they have already made up their minds on a November hike provided there are no material changes in the geopolitical outlook," Allan Monks, a senior economist at J.P.Morgan, said in a note.
Monks expects a rate hike in November and another one in 2027. Following this he expects the BoE to stay put on borrowing costs, unless there is clearer evidence of a second round of inflation effects such as wage expectations rising to 4%.
He previously expected the central bank to hike rates once in November 2026 and then reduce rates twice in 2027.
Along with the rate decision, the BoE also paused its sales of government bonds for six months and it began a longer-term overhaul of how it shrinks its debt holdings.
The announcement sent bond yields lower and came ahead of the Andy Burnham government's keenly awaited budget next month at a time when global fixed-income investors are concerned about soaring developed market debt.
"This is a clear and assertive plan designed to reduce uncertainty at a time when market conditions are volatile," J.P.Morgan said.
"This is a big surprise given the associated optics of blurring the line between BoE and government decisions."
Reporting by Kanchana Chakravarty and Johann M Cherian in Bengaluru; Editing by Maju Samuel
Source: Reuters