BoE preview: MUFG expects November rate hike as energy shock pushes UK inflation above 4%
At a Glance
The desk anticipates a 25 basis point rate hike by the Bank of England on November 5, driven by persistent energy price increases pushing UK inflation back above 4% in the coming months. Per the full note from MUFG, the BOE is likely unable to overlook the energy shock, given the economy's relative strength, and suggests a follow-up hike in February could further support the pound. Current market sentiment appears to favor sterling against weaker currencies, while UK gilts are under pressure due to rising yields and constrained fiscal space ahead of the Budget. Importantly, this call aligns with wider market expectations for continued tightening underpinned by energy cost fluctuations.
Key Takeaways
- 01MUFG forecasts a 25 basis point rate hike at the BOE's November 5 meeting due to inflation pressures.
- 02UK inflation is projected to exceed 4% as energy prices remain elevated.
- 03Another rate hike is likely by February, further supporting GBP.
- 04Gilts remain vulnerable as monetary tightening and fiscal constraints mount.
Full Analysis
What the desk is arguing
The desk strongly believes that the Bank of England will increase rates by 25 basis points at its upcoming meeting, aligning with MUFG's expectations outlined in their recent commentary. The underpinning energy shock indicates that inflation will rise above 4%, compelling the BOE to act decisively.
High energy prices have proven persistent, and with domestic growth benchmarks tracking positively—such as a Q3 GDP expectation of about 0.65% quarter-on-quarter—MUFG suggests that the BOE is now boxed in by external inflation pressures and internal economic strength. Furthermore, they project that another rate hike could follow in February, reinforcing market support for GBP against slower-reacting currencies.
Where it sits in our coverage
Our current consensus target for GBP/USD is 1.3550, with a range spanning 1.2400 to 1.3800. Prominent firms contributing to this are: - rabobank: Dec-26 target of 1.3300 - bofa: Dec-26 target of 1.3700 - scotiabank: Dec-26 target of 1.3600
The desk's outlook on GBP strength in light of anticipated BOE tightening aligns with the broader consensus, which expects continued upward adjustments to the currency. This positioning is notably near the upper end of the consensus range.
How other firms see it
A group of firms, including hsbc and rbc, are aligned with our view, anticipating that proactive monetary policy will bolster GBP's position. Conversely, firms such as nomura and citi present a more cautious outlook, citing potential economic headwinds that could undermine the BOE's plans.
Market participants should also keep an eye on the USD/JPY trajectory, which may respond in tandem with the BoE rate path as cross-currency impacts gain relevance.
What the calendar says
As there are no high-impact events scheduled in the next 30 days, upcoming monetary policy changes will likely hinge on the November 5 meeting.
Market Implications
Traders should watch for potential GBP strength against slower currency pairs, particularly if the BOE signals further tightening post-October. A level of 1.3550 is critical to monitor in GBP/USD, as this aligns with consensus and could indicate a stronger bullish trend coming.
GBP/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Rabobank | Bearish | 1.3300 |
ING | Neutral | 1.3500 |
MUFG | Bullish | 1.4000 |
From the original
A hike on November 5 would extend the energy-driven tightening seen across central banks. Any guidance pointing to a February follow-up would likely support sterling, particularly against currencies where central banks are seen as slower to respond. Gilts look the more vulnerable
Related speeches
4 itemsBank of England set for first rate hike as energy shock worsens
The Bank of England is poised for its first rate hike, expected to incrementally raise rates by 25 basis points to 4%, driven by mounting inflationary pressures from rising energy costs. Per the full note from ING, a 7-2 vote is anticipated, and further moves could follow in February given the substantial rise in energy prices. This evolving scenario places pressure on the Bank to adapt its trajectory away from its previous stance of 'active hold.' The market response has been mixed, indicating pricing challenges ahead as traders recalibrate expectations in light of potential inflation peaks above 4% in early 2024, with the next monetary policy review coming on November 5th.
Why we now expect two Bank of England rate hikes
The Bank of England is expected to implement two rate hikes in the coming months, driven primarily by a resurgence of inflation expectations amid rising energy costs. Per the full note from ing-think, economists are projecting a November rate hike as inflation is forecasted to exceed 4% due to increased household energy bills, followed by another hike in February. This shift in monetary policy comes on the heels of recent stability maintained during geopolitical tensions, suggesting that the BoE is ready to take proactive measures against inflation. The consensus view could pivot as the market reassesses the potential pace of rate adjustments in response to evolving inflation data.
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