The BOESPEAK natural language processing model, which tracks the statements of Bank of England Monetary Policy Committee (MPC) members, indicates that central bank officials are sending their most hawkish signals in more than three years, paving the way for a rate hike as early as next month.
The BOESPEAK model shows a shift in the Bank of England MPC's stance. Following a series of recent speeches by Bank of England officials during International Monetary Fund (IMF) and World Bank meetings, the BOESPEAK index climbed to its highest level since early 2023. The index has risen sharply since the end of August. Although it has since pulled back slightly from its peak, it remains near its highest level since March 2023, when UK inflation stood at 10%, the interest rate was at 4% and still rising.
Economist Dan Hanson commented: "The rise in this index is very striking, and it coincides precisely with the climb in energy costs over recent months." He expects the Bank of England to raise rates in November and again in February next year. He added: "Of course, it is also possible that the MPC is merely sending a hawkish signal. But we believe the balance of risks surrounding growth and inflation prospects has shifted enough to convince a majority of committee members that higher rates are needed."
Unlike the Federal Reserve and the European Central Bank, the Bank of England has not yet tightened monetary policy in response to the worsening inflation shock caused by conflict in the Middle East. However, a growing number of Bank of England officials have begun warning about potential second-round inflation effects, whereby businesses pass on higher costs to consumers while workers demand higher wages.
Investors now see an almost 100% probability of a Bank of England rate hike next month, and expect at least three more increases by July next year. A recent survey showed that economists broadly expect the Bank of England to raise rates in November and again in February next year. The market currently expects the Bank of England MPC to support a 25 basis point rate increase to 4% on November 5, which would be the first in a series of hikes leading up to next summer.
In September, the committee voted 6-3 in favor of keeping rates unchanged, meaning that just two members shifting their stance would be enough to reverse the outcome. Bank of England Governor Andrew Bailey is a key swing vote on the MPC. Although Bailey said no clear second-round inflation effects have yet emerged, he warned that as the energy shock and Middle East conflict persist for longer, avoiding a rate hike is becoming increasingly difficult. His two deputies, Dave Ramsden and Clare Lombardelli, have used similar language, while the Middle East war shows no sign of ending.
Earlier this month, Catherine Mann stated that the UK labor market is "static" rather than loose, and warned that inflationary pressures are becoming entrenched. Mann is one of the most hawkish officials on the Bank of England's Monetary Policy Committee and has consistently argued that rate hikes are needed to prevent the energy shock from spreading to the broader economy. She is also concerned that upcoming wage negotiations will exacerbate inflation already driven higher by rising fuel and energy costs.
Another hawkish official, Megan Greene, said last week that the UK economy is growing faster than expected and the job market remains resilient, which is sufficient evidence that the Bank of England has not done enough to suppress inflation. She recently reiterated that the decline in UK wage inflation appears to have stalled above levels consistent with the 2% CPI target, and stated bluntly that "the risk of second-round effects is greater than we had thought."
The latest data shows that the number of paid employees in the UK unexpectedly rose by 13,000 in September, in stark contrast to market expectations of an 8,000 decline, marking the largest monthly increase since August 2025. August data was also significantly revised upward, from an initial report of a 26,000 decline to a gain of 1,000. In the three months through August, the unemployment rate unexpectedly fell to 4.7%, the lowest since July 2025, while the September unemployment rate held at 4.4%.
The Office for National Statistics noted that although total pay including bonuses has fallen to its lowest level in nearly six years, regular wage growth has remained relatively stable, corroborating Greene's assessment of wage stickiness. Investec analyst Ellie Henderson pointed out that the Bank of England had previously believed that labor market slack would help reduce the risk of second-round effects from the energy shock, but the latest data showing improved employment conditions "may unsettle policymakers."
Bank of England Chief Economist Huw Pill also warned that upcoming wage agreements pose a threat. He said that in a supply-constrained economy, economic activity and the labor market are showing resilience. However, in the view of Bank of England Deputy Governor Sarah Breeden, UK businesses are seeking to absorb the energy shock themselves and cut costs rather than raise prices for consumers. This statement suggests she is cautious about the necessity of a rate hike. But she also emphasized that whether the impact of the energy shock has been weakened or merely delayed remains an open question.
Beyond the hawkish signals from Bank of England officials, recently released economic data has also bolstered market expectations for a rate hike. Data published by the Office for National Statistics last Wednesday showed that the Consumer Price Index (CPI) rose 3.5% year-on-year in September, above August's 3.1% and market expectations of 3.4%. Core CPI rose 2.8% year-on-year, above August's 2.6% and market expectations of 2.7%. In addition, services inflation, a gauge of domestic inflationary pressure in the UK, rose to 3.7%.
Driven by surging gasoline and diesel prices, UK inflation unexpectedly climbed to its highest level in 11 months. The Office for National Statistics said motor fuel costs pushed inflation higher, after diesel prices hit a record high at the end of September as oil prices rose above $100 per barrel. Ordinary UK households will face further financial pressure, as the price cap that determines household energy bills is set to be raised in October. Furthermore, the Bank of England now expects inflation to reach twice its 2% target early next year and has upgraded its third-quarter GDP growth forecast to 0.4%.
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