BoE Signals Openness to Rate Hike Amid High Energy Costs

Bank of England policymakers are increasingly signaling openness to raising interest rates in response to high energy costs, which threaten to keep inflation above target. The central bank expects Britain's inflation rate to rise above 4% early next year, more than twice its 2% target.

Deputy Governors Clare Lombardelli and Sarah Breeden, who both supported keeping the BoE's benchmark interest rate at 3.75% last week, said they are reassessing their positions due to the ongoing energy shock. Lombardelli warned that a prolonged period of higher energy prices could increase the risk of second-round effects on inflation.

Financial markets are pricing in a possible November rate hike, with investors assigning a 75% chance of a 25-basis-point increase and another hike fully priced in by February. Governor Andrew Bailey has previously stated that the BoE's decision to hold off on expected rate cuts earlier this year contributed to tighter financial conditions.

The path of energy prices and developments around the Strait of Hormuz remain central to the BoE's assessment of monetary policy, with analysts suggesting a 25-basis-point increase in November unless there is meaningful progress on restoring energy flows through the Strait.