With a hike almost fully priced, sterling’s reaction will hinge on the vote split and guidance, with a 7-2 outcome and cautious language the most likely route to a softer pound. Gilts could rally if the Bank pushes back on market pricing for several more hikes, particularly at the short end. Oil is the swing factor beyond today: renewed strength in crude and gas would keep pressure on the Bank to tighten further, while any easing in Middle East tensions would weaken the case for a second move. The updated inflation projections will be scrutinised for how much of the energy shock the Bank expects to persist into 2027.
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The Bank of England is set to hike; what it says about the next one will matter more.
Summary:
- The BoE is widely expected to lift Bank Rate by 25 basis points to 4%, at 12:00 GMT (07:00 ET)
- It held at 3.75% in September in a 6-3 vote, with three members favouring a hike
- UK CPI rose to 3.5% in September from 3.1%, driven by fuel costs
- Goldman Sachs expects a 7-2 vote, with the committee ready to respond but giving no strong steer
- Many economists see one more hike, to 4.25%, early next year, less than markets price
- New forecasts are likely to show inflation peaking above 4% in early 2027
The Bank of England is widely expected to raise interest rates on Thursday for the first time in this cycle, lifting Bank Rate by 25 basis points to 4% as energy costs push UK inflation further above target, with the decision due at 12:00 GMT (07:00 ET).
The move would follow a closely divided September meeting, when the Monetary Policy Committee held Bank Rate at 3.75% in a 6-3 vote, with three members already favouring a rise to 4%. Since then, the inflation picture has deteriorated. Consumer prices rose 3.5% in the year to September, up from 3.1% in August and higher than expected, driven largely by rising fuel costs.
Markets have almost fully priced in a hike, and research houses are close to unanimous. Goldman Sachs expects a 7-2 vote in favour, a split shared by much of the consensus, with the two likely dissenters preferring to hold. Some forecasters see a narrower margin.
The more important question for markets is what comes next. Money markets have priced in several further increases over the coming year, a path many economists consider too aggressive. The more common base case is one additional quarter-point rise early next year, taking Bank Rate to 4.25%, possibly in February, when inflation is projected to peak. Goldman expects the committee to signal readiness to respond if inflation pressure builds, but without a strong steer on future meetings.
This is also a forecast meeting, with the Bank publishing an updated Monetary Policy Report. Its new projections are likely to show a higher near-term inflation peak in the first half of 2027, with Goldman expecting it at above 4%. Oil and gas prices are now running above the adverse scenario the Bank set out in July, raising the risk that the Middle East conflict leaves a more lasting mark on UK inflation.
That is the central concern for the hawks. Underlying measures remain firm, with services inflation approaching 4%, and the key risk is that higher energy costs become embedded in wages and price-setting. Against that, wage growth has been described as soft and the consumer is under pressure, giving the doves grounds for caution.
For sterling and gilts, the guidance and vote split are likely to matter more than the hike itself. A cautious message alongside a widely expected increase could see markets pare back their more aggressive pricing, while any sign of a faster pace would reinforce it.
This article was written by Eamonn Sheridan at investinglive.com.