Barclays raises Bank of England terminal rate forecast to 4.5%

(Reuters) - Barclays raised its terminal rate forecast for the Bank of England's benchmark policy rate by a quarter point to 4.5%, following the central bank's eleventh straight hike last week.

Barclays had expected a pause from the BoE in the March meeting, but following a 25 basis points hike to 4.25%, and data last week that showed an unexpected rise in British inflation, the British bank retained its call for another quarter percentage point hike in May.

Barclays also raised its forecast for UK's gross domestic product (GDP) for the first three quarters of the year between 0.1-0.2 percentage points, encouraged by a rebound in manufacturing in the first three months of 2023, as well as a stronger-than-expected pick up in economic growth in January.

The new forecast implies a "minimal recession", Barclays economists led by Marian Cena said. They expect 2023 GDP to contract by 0.3% year-on-year.

Following the hikes this year, Barclays projects 100 bps of cuts to the BoE's bank rate in the second half of next year, 50 bps more than its previous prediction. It sees the rate ending at 3.5% next year.

"By mid-next year the (monetary policy) committee should be attuned to the risks of inflation falling well below target at the relevant policy horizon if the policy stance is left unchanged. Hence, we expect policy rates to turn more accommodative," Cena said.

(Reporting by Susan Mathew in Bengaluru; Editing by Dhanya Ann Thoppil)