The Bank of England is expected to leave Bank of England interest rates unchanged at 3.75 per cent on Thursday, even as bond markets signal growing pressure for a hike and the US Federal Reserve moved to tighten policy the day before.
The Bank’s nine-member Monetary Policy Committee (MPC) is forecast to vote to hold, though the decision is far from unanimous. MPC members Huw Pill, Megan Greene and Catherine Mann are all expected to renew calls for a 25 basis point increase. Some City forecasters believe Clare Lombardelli could join the trio, widening the dissenting bloc.
Pill’s public case for a rate rise
The Bank’s former chief economist added his voice to the debate on Tuesday evening, describing the choice between hiking on Thursday or waiting until November as a ‘coin toss’. Pill has argued that raising rates now would send a clear signal of the MPC’s commitment to its 2% inflation mandate, according to MPA Magazine. That framing matters: it shifts the argument from whether inflation warrants a hike to whether the Bank’s credibility demands one.
The backdrop is uncomfortable. CPI inflation edged up to 3.1 per cent in the year to August, driven by a rise in fuel prices. Sanjay Raja of Deutsche Bank said the new pricing data pointed to a hike on the horizon. He flagged ‘worrying trends’ in services prices, particularly private rents and health costs, which he said could squeeze household budgets. Relative to the Bank’s own central judgements, Raja said, ‘inflation momentum is running hotter than expected’. He added: ‘Rates may be restrictive, but the key policy question for the MPC will remain: are they restrictive enough? Risk management considerations have become stronger, and the likelihood of rate hikes have strengthened of late.’
Bank of England interest rates and the jobs market complication
The case for holding is rooted largely in the labour market. Private sector wage growth has fallen to lows not recorded in nearly six years, and both the number of employees and vacancies dropped over the summer. Policymakers will weigh whether those trends are enough to dampen any wage-price spiral over coming months before committing to further tightening.
ING economist James Smith said a continuation of the Middle East conflict blocking trade through the Gulf, which could keep oil and gas prices elevated, might lead the Bank to warn more forcefully against ‘second round effects’. Smith said forecasts pointing to inflation reaching 4.5 per cent strengthen the argument for a rate rise, though ING analysts expect energy prices to ease later this year ahead of the US mid-term elections.
Gilt markets have been sending their own signal. The two-year gilt yield, a gauge of short-term interest rate expectations, stood at just over 4.6 per cent on Wednesday afternoon, reflecting the market’s view that borrowing costs have further to travel.
Thursday’s announcement will also cover the Bank’s quantitative tightening (QT) programme for the coming year, the process by which gilt holdings are sold back to investors. City analysts expect policymakers to vote to slow those sales after the annual target was reduced from £100bn in 2025 to £70bn this year. The Bank’s own analysis has acknowledged that QT has added to pressure on gilt yields, even as officials have maintained that the policy operates in the ‘background’ relative to core monetary decisions.
Politicians have not stayed quiet. Richard Tice, deputy leader of Reform UK, is among those at Westminster pressing the Bank to halt QT entirely, citing the costs absorbed by taxpayers. Governor Andrew Bailey has argued that different accounting methods could give the Bank more flexibility to manage long-term shocks and reduce market distortions.
The Federal Reserve’s move on Wednesday to raise rates by 25 basis points, lifting its target range to between 3.75 per cent and four per cent, has sharpened the political optics for Threadneedle Street. A Peel Hunt economist said the decision left the Bank as an ‘awkward outlier’, with the European Central Bank having separately raised rates the previous week. The MPC’s verdict lands on Thursday.
