One more and done for Bank Rate
The Bank of England raised Bank Rate by 25bp to 4.00% today, its first increase since August 2023, in line with our call and near-full market pricing.
The surprise lay in the vote and in the projections, which skewed hawkish at first glance. Rather than the 7-2 split we flagged this morning, with Dhingra and Taylor backing a hold, the MPC voted 8-1, and the lone dissent came from Catherine Mann, who preferred 50bp of tightening. CPI projections, meanwhile, now forecast inflation peaking at near 5% in Q2 2027. We have updated our base case to incorporate a follow-up rate rise in December, before an extended hold in the new year.
Nine months into the Middle East conflict, energy remains almost the entire story for price growth, and the MPC. The Bank’s projections are conditioned on Brent averaging $108 and UK gas 216p/therm over the 15 working days to 27 October, 38% and 81% above July levels and even above July’s adverse scenario.
On that basis, CPI is now seen at 3.8% in Q4, reaching around 4.5% in Q1 and averaging 4.9% in Q2 2027, before subsequently cooling, with Budget measures shaving roughly a quarter point off headline inflation. The minutes concede that evidence of second-round effects remains limited, with firms absorbing costs through margins and hedges. But crucially, the MPC has judged those buffers temporary, with risk of persistence higher the longer energy costs remain elevated.
On this point, Governor Bailey was notably direct in his latest comments. He called the case for 25bp clear, saying that, absent news softening inflation risks, he could see the argument for a further increase before a more conditional approach thereafter.
Tellingly, Pill, Lombardelli and Greene went further, each signalling that one hike is unlikely to suffice. Accompanied by Catherine Mann, that gives a majority of the MPC signalling further tightening. Timing-wise, several MPC voters suggested a “near term” move, which we think favours a December rate rise.
Accordingly, we now see a 25bp hike to 4.25% on December 17th as the most likely next step, followed by an extended pause. An October rise in Ofgem’s energy price cap should mechanically push headline price growth to 3.8% YoY, meaning inflation data is unlikely to derail a follow-up move.
Two connected factors argue against going further, however. First, the conditioning path is already stale: Brent has fallen roughly 20% in three sessions to around $95 as the Democrats’ midterm sweep revived hopes of a US-Iran settlement. Second, even assuming that energy prices meet Bank staff forecasts, we see downside risk to the updated inflation path, with energy costs, fiscal consolidation and higher rates likely to weigh on activity. Together, we think that poses a challenge to further Bank Rate increases beyond the December meeting.
If correct, this suggests tighter policy relative to market expectations in the near term, but with Bank Rate likely to peak below current swap implied levels. So, while the pound nudged fractionally higher post-announcement, and December hike odds moved from about one-in-four to nearer 50/50, we think sterling remains vulnerable on a reassessment of 2027 hiking odds into the back end of the year.