BoE Expected to Raise Rates to 4.0% in November, but Further Hikes Remain Uncertain

  • The Bank of England (BoE) is expected to raise its Bank Rate to 4.0% in November, for the first time in more than three years, according to a majority of economists polled by Reuters. Economists have reversed their earlier expectations that rates would remain unchanged for the rest of 2026, amid persistently high inflation.
  • A strong majority, 54 of 63 economists surveyed between October 12 and 14, forecast a 25-basis-point increase at the BoE's next policy meeting. This marks a significant shift from September's survey, when approximately 90% of respondents expected rates to remain unchanged for the rest of 2026.
  • The shift in expectations comes amid persistently high inflation, stronger-than-expected economic performance and rising government bond yields. UK inflation stood at 3.1% and was forecast to rise towards 4.0%, almost double the BoE's 2.0% target. Higher energy prices stemming from the US-Israeli war with Iran have contributed to inflationary pressures, although these have not yet spilled over significantly into broader consumer prices.
  • However, there is still no majority among economists for further rate increases beyond November. Nearly half of respondents expected another increase in Q1 2027, while financial markets were fully pricing in four quarter-point rate increases by the end of next year.
  • Inflation is forecast to average 3.6% in Q4 2026 and 3.8% in Q1 2027, up from previous estimates of 3.3% and 3.2%, respectively. Meanwhile, the UK economy is projected to grow 1.3% in 2026, revised upward from 1.1%, while growth forecasts for 2027 and 2028 remained unchanged at 1.2% and 1.5%, respectively.
  • The shift towards a November rate increase reflects growing concern that elevated energy prices could lead to more persistent inflation. However, the divergence between economists and financial markets over subsequent rate hikes highlights uncertainty surrounding the monetary policy outlook, particularly if higher borrowing costs begin to constrain economic growth.

(Source: Reuters)