Bank of England poised to raise rates but may push back on bets for more

MANCHESTER: The Bank of England (BoE) is expected to bow to inflation pressure from soaring energy costs and raise interest rates on Thursday, though it may push back against investors' bets that several more increases will follow next year.

Economists polled by Reuters expect the BoE to raise Bank Rate to four per cent from 3.75 per cent, its first hike since August 2023, when inflation was still more than triple its two per cent target.

The BoE was criticised for underestimating how persistent inflation would prove the last time energy costs surged, and it is wary of being caught out again, with global energy prices high and little sign of a lasting end to the Iran war.

Back then, the BoE was among the first major central banks to raise rates. This time the US Federal Reserve and the European Central Bank have moved first.

BANK OF ENGLAND'S HAND "INCREASINGLY FORCED"

Governor Andrew Bailey has said the BoE cannot wait for conclusive proof of second-round effects, where higher inflation feeds into wage- and price-setting, or it will act too late.

But how much evidence is enough, and whether the drawn-out Iran war makes some second-round effects inevitable, have divided the Monetary Policy Committee, which voted 6-3 to hold rates in September.

Bailey said last month that businesses he had spoken to seemed to be absorbing higher costs more than in 2022.

In September the BoE warned that inflation would rise above four per cent early next year, and said the jump in energy prices since its July forecasts bore similarities to its "adverse" scenario, in which inflation risked becoming entrenched.

Inflation has since run hotter than the BoE expected. Consumer prices rose 3.5 per cent in the year to September, compared with the central bank's July forecast of three per cent.

"In other words, their hands are increasingly being forced, whether they like it or not," said Stefan Koopman, senior macro strategist at Rabobank.

"At some point, even a committee that would probably rather sit tight has to make good on at least some of what is priced (in the market). That time is now."

SOME MPC MEMBERS HAVE CRITICISED THE BOE

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 continue to vote to keep rates steady.

Both have stressed spare capacity in the economy as a reason to wait, though recent growth figures have surprised to the upside.

Hawkish policymakers such as chief economist Huw Pill and external members Catherine Mann and Megan Greene have criticised the BoE's handling of the current episode.

But even they 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 per cent and five per cent.

"While we don't expect a clear steer from the Committee on how many hikes they're planning, it's possible that the meeting minutes or Bailey ... signal that Bank Rate is unlikely to reach the level that is priced in by financial markets," said Alexander Harvey, UK economist at consultancy Oxford Economics.

STATEMENTS WILL OFFER CLUES TO RATES OUTLOOK

Harvey said individual MPC members' statements would offer important clues to the outlook, particularly those of the BoE's internal members, whose views have been finely balanced.

Unlike financial markets, economists polled by Reuters last month were split on whether further hikes would follow after November's.

Mann has argued that aggressive bets on rate hikes reflect a risk premium the BoE itself exacerbated by adopting a "wait-and-see" stance after war broke out in the Middle East, rather than signalling clearly that it would keep inflation in check.

Alongside new economic forecasts, investors will be watching for the BoE's initial assessment of finance minister John Healey's budget, delivered last week.

Healey offered modest support to households and motorists struggling with higher energy costs, funded partly by a tax on banks. Economists said the measures would only slightly reduce the expected rise in inflation.

The BoE announces its decision at 1200 GMT on Thursday, with Bailey and some of his deputies holding a press conference at 1230 GMT.