The Bank of England is expected to raise Bank Rate to 4.0% on Thursday, driven by inflation pressure from high energy costs. Investors bet on more hikes in 2027, but policymakers may push back against that pricing.
Economists polled by Reuters expect the BoE to raise Bank Rate to 4.0% from 3.75%, which would be its first hike since August 2023. The central bank is wary of being caught out again, with global energy prices high and little sign of a lasting end to the Iran war.
Inflation runs hotter than the BoE forecast
Consumer prices rose 3.5% in the year to September, compared with the central bank's July forecast of 3.0%. In September, the BoE warned that inflation would rise above 4% early next year.
Governor Andrew Bailey has said the BoE cannot wait for conclusive proof of second-round effects, or it will act too late. The Monetary Policy Committee, however, voted 6-3 to hold rates in September. Stefan Koopman, senior macro strategist at Rabobank, said: "their hands are increasingly being forced, whether they like it or not"
Markets price more hikes than policymakers may back
The Reuters poll pointed to a 7-2 vote in favour of a hike, with external members Alan Taylor and Swati Dhingra seen as most likely to keep voting for steady interest rates. Both have stressed spare capacity in the economy as a reason to wait.
Even hawkish policymakers may baulk at endorsing market pricing of three to four more quarter-point hikes in 2027, which would take Bank Rate to between 4.75% and 5.0%. Alexander Harvey, UK economist at Oxford Economics, said it is possible that the meeting minutes or Bailey signal that Bank Rate is unlikely to reach the level markets price in. Economists polled by Reuters last month were split on whether further hikes would follow November's.
Investors will also watch for the BoE's first assessment of finance minister John Healey's budget. Economists said its measures would only slightly reduce the expected rise in inflation. The BoE announces its decision at 1200 GMT on Thursday.
Source: Investing.com (Reuters)
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