BOE Defies Fed's Rate Hike Lead Amid UK Inflation Surge

The Bank of England is likely to hold off on raising interest rates despite rising inflation in the UK, diverging from its peers among major central banks. The central bank's decision, due Thursday, has been priced in by markets with an over 80% chance that it will keep interest rates steady, according to LSEG data. However, a hike of at least 25 basis points is widely anticipated for the Bank of England's next meeting in November. This would mark a divergence from other major central banks, which have recently raised rates in response to inflation concerns.

The UK's inflation rate rose to 3.1% in August, its first increase above 3% since March. The spike was largely driven by rising motor fuel costs, which surged 23% year-on-year. As a net energy importer, the UK is particularly vulnerable to external energy shocks and is still grappling with a cost-of-living crisis brought on by post-Covid inflation and the Russia-Ukraine war's impact on natural gas supplies.

Global inflation concerns have put pressure on British government bonds, known as gilts. Britain has the highest borrowing costs in the G7, with yields on its long-dated 20- and 30-year gilts approaching the 6% mark. The Bank of England may announce plans to stop selling these gilts alongside its interest rate decision.