BofA says UK inflation set to slide, but rate cuts not 'imminent'

Nevertheless, whether Bank would hike interest rates again in May was a "close call" as demand was holding up better than expected and following February's inflation surprise.

In particular, it remained to be discerned whether the sharp increases in food, clothing and catering prices in February were noise rather than signal.

Inflation had been driven by negative supply shocks, they said, while economic growth had essentially been nil since 2019.

But now two of those shocks, from energy prices and supply chains, were easing, which should suffice for inflation to drop "sharply".

"We can be confident that inflation will fall sharply because utilities, petrol, food and goods account for the majority of inflation, and the drivers of those components point to slowing sequential inflation," they added.

Consumer price inflation was seen slowing to 10% in March, to 7.6% in April and then to 3.8% by October.

However, a drop in inflation to 3% would be the "easy" part, thanks to base effects, while getting below that pace of increases would be harder and take longer.

"The UK has both a labour market as tight as the US and an energy shock as big as the Euro area," they said.

Indeed, as a result of the slight firming in wholesale energy costs, BofA raised its forecast for CPI inflation in 2023 by 30 basis points to 6.6%.

The forecast for RPI was bumped up by 10 basis points or one tenth of a percentage point to 8.7%.

Core CPI was only seen falling slowly to 4% by the end of 2024, which they expected would weigh on growth.

Furthermore, in order to return inflation to target, Bank would need to keep demand growth beneath the economy's low potential growth rate of circa 1% in order for imbalances in the jobs market to unwind and to re-anchor inflation expectations.

"While rate hikes are nearly over, in our view, rate cuts are not an imminent prospect."