Bank of England: Hawkish shift means rate hikes to come

The Bank of England’s Monetary Policy Committee voted 6-3 to keep Bank Rate on hold today at 3.75%, as widely expected. Three MPC members continued to vote for a 25bp hike, as in recent meetings. While the vote split stayed the same, there has been a clear shift in views among the centrists on the MPC. Specifically, Governor Bailey noted the “loss of urgency to find solutions” to the Iran conflict and the disruption to energy supplies, and that if the conflict persists “as appears to be the case, and the risk of second-round effects emerging increases, it is likely that policy may have to tighten.” This is a material hawkish shift from his previous remarks in July. Remarks by fellow centrist Deputy Governor Dave Ramsden were similarly more hawkish, with him concluding “were upside pressures on the inflation outlook to continue to build, there could be a case for increasing Bank Rate.” Another centrist, Sarah Breeden said “if risks to the outlook for second-round effects crystallise, it becomes increasingly appropriate for Bank Rate to respond.”

With these members sending clear signals that they would support hikes if current trends persist, the balance on the MPC is moving decisively in favour of rate hikes. This week, we made significant changes to our macro base case and now expect high energy prices to persist for much longer than we did previously. This is expected to keep inflation higher for longer, raising the risk of second round effects taking hold. The BoE already has had rates in somewhat restrictive territory, so has had the luxury to be patient so far. But more persistent high energy inflation raises the risks of inflation expectations becoming de-anchored. Given the UK economy has also been faring better recently, the BoE now looks poised to respond alongside other major central banks. We therefore change our call and now expect two rate hikes. Our new base case sees the MPC raising rates twice over the coming months, with a 25bp hike expected in November and another in February, to coincide with the BoE’s Monetary Policy Report and forecast updates. Similar to the Fed and the ECB, we expect rate cuts to resume in Q4 2027 as the energy shock eases.