MANCHESTER: The Bank of England (BoE) is expected to bow to inflation pressure from soaring energy costs and raise interest rates, 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 the bank rate to 4% from 3.75%, its first hike since August 2023, when inflation was still more than triple its 2% 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.
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 (MPC), which voted six-to-three 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 4% 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% in the year to September, compared with the central bank’s July forecast of 3.0%.
“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.”
The Reuters poll pointed to a seven-to-two 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% and 5%.
“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 the bank rate is unlikely to reach the level that is priced in by financial markets,” said Alexander Harvey, UK economist at consultancy Oxford Economics.
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. — Reuters
