BoE Holds Fire as Energy Shock Fuels Hike Bets

The Bank of England is expected to hold its benchmark interest rate at 3.75% on Thursday, but investors are closely watching for any signs that a recent surge in energy costs could push the Monetary Policy Committee towards a hike sooner than expected.

The jump in oil and gas prices, driven by the ongoing Iran conflict, has already pushed the Federal Reserve to raise rates and the European Central Bank is also likely to follow suit. This has left sterling and UK rates markets more exposed to the path of oil and gas prices than to Thursday's rate decision itself.

Markets are pricing an 80% chance of a quarter point hike in November, but economists remain far less convinced, with only around one in eight expecting a November move. J.P. Morgan economist Allan Monks said that while the BoE is likely to stay on hold this week to avoid feeding market expectations for a rapid tightening cycle, he continues to expect a hike in November.

The BoE will also update its gilt sales plans Thursday, with reports suggesting it may halt sales of 20 and 30 year gilts or exit secondary market sales altogether. This could give finance minister John Healey more fiscal room ahead of his first budget statement on October 28.