The Bank of England is widely expected to leave interest rates unchanged on Thursday, despite UK inflation climbing well above its 2% target. Markets are pricing in more than an 80% chance of a hold, according to LSEG data, but a hike of at least 25 basis points is anticipated at the November meeting.
A hold would mark a clear divergence from other major central banks. The U.S. Federal Reserve announced a quarter-point rate increase on Wednesday, its first since 2023. Earlier last week, the European Central Bank delivered its second rate hike of the year, having raised for the first time since 2023 in June. The Bank of Japan is also expected to raise its key rate at the conclusion of its two-day meeting on Friday.
The Bank of England has not changed its benchmark rate this year, with its last move coming in December when it cut rates by 25 basis points.
Data released Wednesday showed UK inflation rose to 3.1% in August, marking the first time it has exceeded 3% since March, according to the Office for National Statistics. The rise was largely driven by motor fuel costs, which surged 23% year-on-year. As a net energy importer, the U.K. remains particularly exposed to external energy shocks and continues to grapple with a cost-of-living crisis triggered by post-pandemic inflation and the impact of the Russia-Ukraine war on natural gas supplies.
Global inflation concerns, political instability and apprehension about UK fiscal policy have pressured British government bonds, known as gilts, throughout the year. Britain carries the highest borrowing costs in the G7, with yields on its long-dated 20- and 30-year gilts nearing the 6% mark. Earlier this week, The Telegraph reported that the Bank of England would announce plans to halt sales of 20- and 30-year gilts alongside its rate decision.
Scott Gardner, an investment strategist at J.P. Morgan Personal Investing, said the inflation increase was "unlikely to convince the Bank of England to hike interest rates just yet" but could raise fresh concerns about the inflation outlook among policymakers. "The U.S.-Iran conflict began over six months ago but higher energy costs are still filtering through to business input prices and household spending," he wrote in a Wednesday note.
Shreyas Gopal, an FX strategist at Deutsche Bank, said the absence of materially hawkish signals in both this week’s UK labor market and inflation data had been "enough for pricing for [hikes at] this upcoming meeting to fall back again."
