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.
What the desk is arguing
The desk firmly interprets the BoE's expected interest rate increase as a direct response to rising inflation driven by energy costs. Recent commentary from ing-think suggests that the central bank's stance will shift in light of a forecasted inflation rate exceeding 4% next year, with a specific focus on November as the most probable timeframe for the initial hike.
The anticipated increase in household energy bills, projected to rise by around 20% in January according to gas futures prices tracked, aligns with the BoE's historical concern about second-round inflation effects. With current inflation at 3.1%, the near-term trajectory indicates that unless energy prices recede significantly, the central bank will likely act to avoid inflationary pressures breaching its target thresholds.
Where it sits in our coverage
Our consensus target remains at 1.075 for the GBP/USD pair, with specific recalibrations from firms like:
The desk's call for rate hikes is at the upper end of the expected range as it aligns with monetary tightening trends, differing from some bearish views. Notably, bofa maintains a more dovish stance on the GBP outlook compared to jpmorgan's more aggressive target, marking a divergence that traders should monitor closely.
How other firms see it
Overall, firms like jpmorgan align with the desk's hawkish stance on potential rate hikes, suggesting a prevailing sentiment towards increasing interest rates in response to inflation. Conversely, firms such as bofa express a more cautious view, positioning themselves against the escalating rate sentiments of their counterparts.
The trajectory of GBP/USD will be closely linked to the BoE's rate path as well as the inflation indicators that could signal further tightening. Other related factors include household consumption levels and energy market dynamics that could heavily influence inflation outcomes moving forward.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Expectations for two rate hikes from the BoE in November and February driven by inflation concerns.
- 02Rising energy costs projected to push inflation above 4%, significantly influencing rate decisions.
- 03Current interest rates being maintained as a form of tacit tightening amid geopolitical uncertainties.
Market implications
Watch for GBP/USD near the 1.075 level as speculation builds around the BoE's November decision. A firm commitment to tightening by the BoE could shore up GBP, especially if inflation trends continue upward.
Risks to this view
Key risks to this outlook include a sudden drop in energy prices or unexpected reductions in inflation rates, which could prompt the BoE to delay heightening rates or even consider cuts in the near term.
Articles Why we now expect two Bank of England rate hikes Published 09:53 United Kingdom Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Inflation looks set to briefly top 4% next year and that's likely to trigger a November insurance rate hike from the Bank of England. We tentatively expect that to be followed by another hike in February. But we're still sceptical that we'll see big second-round effects on inflation.
We think rates could be cut again by late 2027 James Smith The Bank of England has held rates steady throughout the Iran war, but we think that is about to change Elevated natural gas prices point to a November rate hike Having kept rates on hold throughout the Iran war, we now expect the Bank of England to deliver two rate hikes, in November and February, for two key reasons: First, Bank officials have made it increasingly clear that a hike was likely if energy prices didn't significantly fall ahead of the November meeting. Since early on in the crisis, the Bank has made it clear that, absent the war, it would have cut rates at least twice this year. So by simply not doing that, it has, in effect, tightened policy by 50bp – akin to what the European Central Bank has done so far.
A Bank of England hike in November could therefore be placed into the same category as the ECB’s well-telegraphed December move. Second, it’s also clear that the inflation profile is likely to become uncomfortably high for the Bank. Last summer, it argued that when inflation surpasses 4%, we are statistically more likely to get second-round effects.
And though headline inflation is currently 3.1%, a circa 20% rise in household electricity/gas bills forecast for January could get us there. That’s based on an average of gas futures prices between mid-August and mid-November, so with two-thirds of that window already behind us, there’s only limited scope for that rise in bills to be mitigated if wholesale prices suddenly fall. And crucially, our commodities team don’t think they will.
Combined with a likely increase in food inflation, it means we’re now briefly forecasting 4% CPI in early 2027. The Bank’s own November forecasts are likely to show that too. There's no sign that the energy shock is broadening out Source: Macrobond, ING calculations "> Source: Macrobond, ING calculations That said, there are still good reasons to think inflation won’t become the problem the hawks fear.
Last autumn provides a useful precedent: headline CPI got perilously close to 4% yet triggered no discernible pressure elsewhere in the inflation basket. The fundamental reasons for that – like the fragile jobs market and tighter fiscal backdrop – haven't changed. And while it’s early days, there’s no sign yet that the Iran war is putting upward pressure on energy-sensitive parts of the inflation basket – quite the opposite.
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