BofA and Credit Suisse believe the UK will raise interest rates for the first time since the outbreak sooner than previously expected.
The two banks had previously thought the Bank of England would not act until 2023, but are now expected to raise interest rates for the first time in the second and third quarters of next year, respectively. Earlier, UK inflation soared unexpectedly, breaking the central bank's 2 per cent target for the first time in nearly two years, while economic growth accelerated and more jobs were being created.
The expectation reflects optimistic expectations of a rapid recovery after the UK economy suffered its worst recession in 300 years. Policymakers at the Bank of England slowed the pace of stimulus last month and may hint at how quickly policy will tighten after next week's meeting.
The Bank of England said it expected inflation to reach 2.5 per cent this year and then fall back to its target, although Bailey, governor of the Bank of England, said he was prepared to tighten policy if there was evidence that inflation continued to rise.
Chris Hare, a senior economist at HSBC, Britain's largest bank, wrote in a report on Thursday that the economic outlook is "in line with the rising risk of raising interest rates in the UK next year." Credit Suisse and Bank of America joined in on Friday, saying they would raise interest rates next year.
"the Bank of England judges that potential inflationary pressures are limited in the near term because unemployment is expected to rise this year with the end of the job support program in September 2021," Credit Suisse economist Sonali Punhani wrote on Friday. "our views are more hawkish, and we believe that the conditions for tightening policy can be met earlier."
Credit Suisse raised its UK GDP growth forecast for 2021 to 7.5 per cent from 6.5 per cent and inflation expectations to 1.8 per cent from 1.7 per cent.
BofA expects the Bank of England to begin quantitative tightening in early summer 2022 or shortly after the first interest rate hike in the spring of 2023.