The Bank of England is poised to raise interest rates for the first time since the Iran war began, with the November 5 meeting expected to deliver a hike. The decision comes as higher energy prices push inflation above 4%, a critical threshold for the central bank. The Bank had previously avoided rate increases, instead relying on a policy of 'active hold' by not cutting rates as initially planned. However, the worsening energy crisis, particularly a spike in natural gas prices, has forced its hand.
The Bank anticipates headline CPI to peak just above 4% early next year, a significant revision from its July forecast of 3.2%. This adjustment reflects the sharp rise in energy costs, with household energy bills set to increase by around 25% in January. Despite this, there are few signs of the feared second-round effects on inflation, with core services inflation and wage growth remaining stable.
The rate hike appears to be more of a precautionary measure than a response to immediate economic data. The Bank is likely to emphasize flexibility in its forward guidance, avoiding commitments to further hikes. Markets have priced in more than four rate increases by this time next year, but the Bank may push back against this aggressive pricing. The impact on sterling remains positive, supported by expectations of higher UK policy rates and improving economic conditions.
Key points to watch include the vote split, with two known doves likely to dissent, and the tone of the forward guidance. The Bank may also address the discrepancy between market pricing and its own outlook, particularly in light of recent dovish repricing for other central banks. The pound has benefited from these expectations, with EUR/GBP falling sharply in recent weeks.