The Bank of England is expected to join its peers in raising borrowing costs Thursday as it attempts to contain a pickup in inflation ahead of an intense period of wage negotiations, but may signal that it does not intend to move as aggressively as some investors anticipate.
The Federal Reserve, the European Central Bank and the Bank of Japan have each raised their key interest rates at least once since the start of the war between the U.S. and Iran, which has raised energy prices.
However, the BOE has remained on the sidelines, with a majority of officials pointing to the fact that their key rate was higher than those of its European counterparts when the war started, while a rise in bond yields has helped to cool inflation at a time of weak demand and a softening jobs market.
But the longer the war lasts, the more likely it is that higher energy costs will lead to increases in the prices of other goods and services. In recent weeks, officials have indicated that an increase in the key rate to 4% from 3.75% is likely.
"We expect the Bank of England's patience to have run out with the unfolding energy shock," economists at Deutsche Bank wrote in a note to clients.
The central bank is also expected to raise its forecast for inflation in anticipation of a large rise in home energy prices that will take effect in January, likely seeing a peak above 4% in the early months of next year from 3.5% in September.
That suggests that the central bank may lift its key rate again early in the new year. But economists also expect BOE officials to avoid an endorsement of market expectations, which see the key rate peaking at 5%.
BOE Chief Economist Huw Pill last month said he was "skeptical" of those expectations. Those remarks were seen as significant for the Monetary Policy Committee as a whole, since Pill has been the most persistent advocate for higher interest rates, and his less hawkish colleagues are therefore likely to be even less persuaded that a move of that size is needed.
Indeed, it is likely that some members of the MPC will vote to leave the key rate where it is Thursday.
"It's possible that the meeting minutes or Governor Andrew Bailey in the post-meeting press conference could signal that Bank Rate is unlikely to reach the level that is priced in by financial markets," economists at Oxford Economics wrote in a note to clients.
The round of pay negotiations that will start in early 2027 is likely to be key to the ultimate peak for the key rate. Since the war started, the MPC has been clear that its main goal is to prevent second-round effects, which can take the form of an acceleration in wages that leads businesses to raise prices as they defend their profit margins.
So far, there are few signs of that dynamic. A survey conducted by the BOE and published Friday found that businesses expect wages to increase at a slower pace over the coming 12 months than they did in the past year.
However, the rise in energy prices will bite over the coming months as Britons heat their homes during a period of colder weather. That jump in energy bills may yet persuade workers to ask for big pay rises, although it's not clear that businesses would be willing to grant them or if they do, would be able to pass on that increase in their costs to customers.
The BOE survey found that 71% of businesses expect the war to lead to narrower profit margins, an indication that they don't expect to be able to recoup higher costs through higher prices.
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