Bank of England Set to Raise Rates to 4% Today, First Hike Since 2023

The Bank of England is expected to raise Bank Rate by a quarter point to 4% at noon today, its first increase in more than three years. The move would lift the rate from 3.75%, and the City of London would treat anything less as a shock.

The logic is straightforward. Inflation is running faster than the Bank's target. Policymakers want to tighten monetary policy now, hoping to dampen the risk that high energy costs spill over into the price of other goods and services. The last hike came in August 2023, when Bank Rate reached 5.25%.

The Bank is also playing catch-up. Rates have already risen this year in the US, Japan, the eurozone, Australia and Canada.

What do markets and economists expect?

Peder Beck-Friis, economist at bond trader PIMCO, said a hike to 4% is "fully priced by markets." He laid out the mechanism:

"The BoE is primarily responding to higher energy prices, but macro data have also turned more hawkish. Growth has been resilient, the labour market has stabilized, and core inflation has edged higher. However, the economy does not look overheated, and pass-through from higher energy prices into core inflation has been modest overall."

Andrew Wishard, senior UK economist at Berenberg, predicts a near-unanimous decision:

"We expect an 8-1 vote in favour of the move, with only Alan Taylor dissenting. Although several rate setters will vote for the hike reluctantly, developments in the real economy justify it. Strong economic growth and a tentative stabilisation of the labour market suggest that an interest rate hike will restrain economic activity only modestly."

Deutsche Bank sees a wider split. Its analysts told clients they expect the monetary policy committee to vote 6-3 in favour of the hike to 4%. The committee divides between hawks, who want higher rates to fight inflation, and doves, who fear higher rates will hurt growth.

Deutsche Bank also predicts the Bank's latest economic forecasts will show inflation rising as high as 4.25% by the first quarter of 2027, alongside an upgrade to the 2026 growth forecast to 1.4%. Their read on the decision:

"We expect the Bank of England's patience to have run out with the unfolding energy shock. Stronger growth has led to a stabilising labour market. Excess capacity may be less than previously thought."

Is another hike coming in February?

A second rate hike in February, to 4.25%, is widely anticipated. James Smith of ING put it this way:

"Another rate hike in February seems to be the growing consensus – and our own view too. There's little precedent for 'one-and-done' rate rises. But it's one thing thinking that, another saying it out loud."

Smith flagged the communication risk. The Bank made a hawkish misstep back in March, when it sounded open-minded about tighter policy and opened the floodgates for markets to price in rate hikes. It will want to tread carefully this time, and a lot can happen between now and February.

Why is oil suddenly helping the Bank?

One pressure valve has opened this week. Brent crude fell through the $100 a barrel mark yesterday, hitting its lowest level in two months, and trades around $95 this morning.

Traders appear to be concluding that Donald Trump might try to deescalate the Middle East conflict after his Republican party was hammered in this week's midterms. Market participants are pricing out the geopolitical risk premium that had been baked in on fears the US would launch fresh strikes after the election.

Kyle Rodda, senior financial market analyst at Capital.com, urged caution:

"Peace talks are in rhetoric alone currently. Meanwhile, it's feared an increasingly lame-duck President Trump could become more active (and arguably reckless) in foreign policy as he seeks to influence policy at a time when there are fewer self-interested reasons to show restraint."

The noon decision will settle the first question. The February vote, and how loudly the Bank signals it, will matter just as much for borrowing costs across the economy.