Bank of England set to raise rates as markets weigh path for further tightening

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BOE rate hike outlook

Highlights

Economists expect the Bank of England to raise Bank Rate from 3.75% to 4.0%, its first increase since August 2023, amid rising inflation pressures.
Consumer prices rose 3.5% in the year to September, above the BoE's July projection, reinforcing concerns of persistent inflation as the Iran war continues.
Markets do not expect the BoE to endorse forecasts for Bank Rate rising to 4.75%-5.0% by 2027, as policymakers cite spare capacity and budget effects as reasons for caution.

Rate decision outlook and policy signals

As reported by Reuters, economists polled by the news agency expect the BoE to raise Bank Rate to 4.0% from 3.75%, marking its first increase since August 2023. The decision is seen as a response to renewed inflation pressure from higher energy prices and concerns that price growth could become more deeply embedded.

The BoE says in September that inflation is likely to rise above 4% early next year, and recent data has strengthened that concern. Consumer prices rise 3.5% in the year to September, above the central bank's July forecast of 3.0%, while Governor Andrew Bailey says policymakers cannot wait for conclusive proof of second-round effects before acting.

The Monetary Policy Committee remains divided over how much evidence is needed and how persistent the inflation shock could become as the Iran war drags on. Reuters' poll points to a 7-2 vote in favour of a hike, with Alan Taylor and Swati Dhingra seen as the most likely members to prefer keeping rates unchanged.

Market expectations and UK economic impact

Even if the BoE raises rates this week, analysts do not expect a clear endorsement of current market pricing for three to four additional quarter-point increases in 2027. Economists say policymakers, including some hawkish members, may hesitate to validate expectations that would take Bank Rate to between 4.75% and 5.0%.

Recent growth figures have surprised to the upside, but some policymakers continue to point to spare capacity in the economy as a reason for caution. Markets are also assessing the BoE's initial reaction to finance minister John Healey's budget, which offers limited support to households and motorists facing higher energy bills and is funded in part by a tax on banks.

Economists say those budget measures are only likely to slightly reduce the expected rise in inflation. The BoE announces its decision at 1200 GMT on Thursday, followed by a press conference with Bailey and other officials at 1230 GMT.

In our earlier article on economists shifting toward a Bank of England rate hike to 4.0%, we explained how persistent inflation and firmer UK data pushed most forecasters to anticipate a first increase in years. We also noted that higher energy costs linked to the Iran conflict and policymakers’ concern about inflation staying above target were key factors, even as the outlook for further hikes remained contested.

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