The Bank of England has indicated it may raise interest rates again in the coming months. Policymakers backed the first rate hike in more than three years and warned that inflation will approach 5% next year. The decision was more hawkish than previously expected.
The Monetary Policy Committee voted 8 to 1 to raise rates by 25 basis points to 4%, prompting traders to increase bets on another hike as early as next month. External member Catherine Mann pushed for a 50 basis point increase, while Bank of England Governor Andrew Bailey said he believed there were "grounds for further rate increases, and then a more contingent policy stance thereafter."
Speaking at a press conference after the rate decision, Bailey said, "Unless progress is made in resolving the conflict, or other news emerges that alleviates the risks of inflationary pressure, it may be necessary to raise Bank Rate further." He stated, "Today's increase should not be regarded as the start of an inevitable long series of consecutive rate hikes."
In an interview, Bailey warned that even if Middle East tensions ease rapidly, higher inflation now appears largely baked in. Bailey said that if energy prices returned to levels seen before this week's sharp drop in oil prices, then "the probability of another rate increase is greater than that of no increase."
Traders increased their bets on further Bank of England rate hikes. The market now prices in roughly a 50% probability of a 25 basis point increase in December, and has almost fully priced in three more 25 basis point hikes by the end of next year.
Rising energy and fuel costs have severely squeezed the living standards of British households. Household energy bills are expected to rise 25% when the regulated energy price cap is reset in January next year, with a further increase in April. The Bank of England expects consumer price inflation to peak at 4.9% in the second quarter of next year, the highest since September 2023.
Economic Research Views
UK economists Dan Hanson, Ana Andrade and Matt Bunny: "The Bank of England's tightening cycle is not over yet — that is the signal sent by its decision to raise rates in November. We believe February is the most likely timing for the next move; December seems too early, especially given the recent decline in energy prices."
Andrew Wishart, senior UK economist at Berenberg, said the Bank of England's forecasts and meeting minutes were "far more hawkish than expected." He said, "The shift in the Bank of England's message today indicates that, relative to our assessment, there is a clear risk that rates may be raised again in February."
Under the adverse scenario set by the Bank of England, if the Iran conflict repeatedly escalates, CPI inflation would rise to 6.2% in the third quarter of 2027. Even in a milder scenario, with no second-round effects, inflation would rise to 4.8% early next year, mainly due to the planned increase in the household energy price cap in January. By comparison, in its previous forecast released in July, the Bank of England projected a peak inflation rate of only 3.2%.
The Monetary Policy Committee emphasized that this early action was taken to prevent rising costs from further affecting wage and price setting. So far, there is little evidence of second-round effects, but the committee is concerned that such effects could emerge once firms' "hedging arrangements and long-term fixed-price contracts" expire. Bailey said, "There are limits to how much businesses can absorb rising energy costs, so some of these costs are likely to be gradually passed on to the prices of goods and services." He added that the recent decline in energy prices was "positive news," but stressed that a significant amount of inflationary pressure has yet to materialize.
Alan Taylor, an external member of the Monetary Policy Committee and one of its most dovish members, wrote, "This is an insurance hike motivated by risk management, for now just this one." Dave Ramsden, the Bank of England Deputy Governor for Markets, said, "Less favorable initial conditions increase the risk of second-round effects."
Because energy prices have deviated far from the Bank of England's previous expectations, the Monetary Policy Committee adjusted its policy guidance, saying it "will continue to assess the evidence at each meeting, with particular attention to the extent to which high energy prices may pass through to other prices and the broader economy."
The Bank of England raised its GDP growth forecast for this year from 1.1% to 1.6%, and its 2027 growth forecast from 1.1% to 1.3%. However, based on the assumption that the energy shock will persist, the Bank of England lowered its 2028 growth forecast from 1.7% to 1.2%. In a "weaker demand" scenario, inflation would fall sharply to 1.2%, implying that rate cuts may be needed at that point.
Marion Amiot, European economist at S&P, said the rate hike was an "obvious decision" after strong economic growth data and signs of improvement in the labor market. She said, "If the economy continues to deliver upside surprises, the Bank of England may have to raise rates again in the first quarter of next year."
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