MPC meeting: Bank of England raises rates, with another hike likely in February
As expected, the Bank of England (BoE) joined the Fed and ECB by voting to raise Bank Rate from 3.75% to 4% in November. The meeting was even more hawkish than expected with every member voting to raise rates and a majority of the Committee signalling that further tightening is likely appropriate. Ultimately, the Bank expects inflation to peak at almost 5%, so we think another hike in February looks like a good bet. Our base case is that rates then stay on hold through the rest of next year, but that depends heavily on how energy prices move over the winter.
First hike, and an even more hawkish MPC than expected
The Committee made clear that the renewed rise in energy prices could no longer simply be looked through. It stated that “the degree of inflationary pressure in the pipeline is now sufficient to warrant an increase in Bank Rate”.
Governor Bailey reinforced that message at the press conference, arguing that the increase was necessary even after energy prices fell in the days immediately before the meeting. With most of the observation window for January’s Ofgem price cap already complete, household energy bills are still likely to rise by around 25%, despite recent falls.
It wasn’t just energy prices that prompted the Bank to hike rates. Dave Ramsden emphasised that “activity has proved more resilient than expected, slack in the labour market is levelling off, and private sector wage growth has stopped declining. These less favourable starting conditions increase the risk of second-round effects.” In short, the stronger economy has increased the likelihood of higher energy prices spilling over into price-setting and wage-bargaining which would result in an even more persistent shock.
All told, the Bank was always likely to hike rates today. The Committee also sounded keen to hike again with five members – enough for a majority – stating that further tightening would likely be appropriate.
At least one more rate rise in 2027
As a result, we expect the Bank to raise rates at least once more, most likely in February, unless there is a sharp and sustained fall in energy prices. There are three key reasons for that.
First, the Bank now expects inflation to peak at almost 5%. That is above the 4% level at which its analysis suggests households and businesses may begin to respond more aggressively to rising prices. Sarah Breeden highlighted that risk, saying: “With inflation expected to be above the threshold for non-linear effects, and little sign of a rapid or durable resolution to the conflict, the degree of inflationary pressure in the pipeline is now sufficient to warrant an increase in Bank Rate.” We doubt that a single 25-basis-point rise is likely to eliminate those concerns.
Second, the MPC said that “households and firms appeared more attentive to outturns for headline inflation than in the past”. In other words, people may react more strongly to another inflation spike, increasing the danger that higher inflation feeds into wage demands and firms’ pricing decisions.
Third, that risk is compounded by stronger-than-expected growth which raises the likelihood of those second-round effects. Resilient demand makes it easier for firms to pass higher costs on to customers, while the improvement in the labour market may give workers more bargaining power over wages.
Admittedly, there is still little evidence of second-round effects emerging, which suggests there is no urgency to hike rates again in December. However, the MPC clearly thinks that the risk is now large enough to justify further tightening rather than waiting for that evidence to become conclusive and potentially falling behind the curve.
All told, Governor Bailey probably summed it up best, saying: "Without news which softens the risks to inflationary pressures, I can see the argument for a further increase in rates." So, unless energy prices fall dramatically and stay down over the winter then another rate hike in February looks like a sound bet. Beyond that, we think rates can then stay on hold throughout the rest of 2027 but that will depend heavily on how energy prices develop.