Bank of England Expected to Raise Interest Rates to 4% on Thursday in First Hike Since 2023

The Bank of England is expected to raise interest rates on Thursday, taking Bank Rate from 3.75% to 4%. It would be the first hike since August 2023.

Why a hike is expected

Economists polled by Reuters expect the rise as the Bank bows to inflation pressure from soaring energy costs. Consumer prices rose 3.5% in the year to September, hotter than the Bank’s July forecast of 3%.

In September, the Bank warned that inflation would rise above 4% early next year. It said the jump in energy prices since its July forecasts looked like its adverse scenario, in which inflation risks becoming entrenched.

Governor Andrew Bailey has said the Bank cannot wait for conclusive proof of second-round effects, where higher inflation feeds into wage and price-setting, or it will act too late. The Monetary Policy Committee voted 6-3 to hold rates in September, but the Reuters poll points to a 7-2 vote for a hike this time, with external members Alan Taylor and Swati Dhingra seen as most likely to keep voting to hold.

What the Bank may push back on

Even if it hikes on Thursday, the Bank may push back against investors’ bets that several more increases will follow next year. Markets are pricing three to four more quarter-point hikes in 2027, which would take Bank Rate to between 4.75% and 5%.

The Bank was criticised for underestimating how persistent inflation would prove the last time energy costs surged, and it is wary of being caught out again, with global energy prices high and little sign of a lasting end to the Iran war.

What it means for households

A higher Bank Rate usually means higher borrowing costs, including on mortgages, while savers may see better returns. The decision on Thursday will come with new forecasts from the Bank, which will show how it sees inflation and growth from here.

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