- MPC hikes rates for first time in three years
- Staff warn inflation could reach 5% by mid-2027
- Higher energy costs threaten growth outlook
- Alternative scenarios underline policy uncertainty
- December hike firmly in play say analysts

By Harry Daniels
LiveSquawk News
@HarryDaniels71

LONDON – Bank of England policymakers raised borrowing costs on Thursday in an effort to contain mounting inflationary pressures, signalling that further tightening could come as early as their next meeting in December.

The BoE’s Monetary Policy Committee (MPC) voted 8-1 to raise the Bank Rate by 25 basis points to 4.00%, broadly in line with expectations. Catherine Mann was the sole dissenter, favouring a larger 50-basis-point increase to 4.25%.

Explaining its decision, the accompanying statement cited the conflict in the Middle East and its impact on “already elevated” global energy prices.

On the domestic front, the Bank projected CPI inflation would climb to around 5% by the middle of next year before easing, reflecting base effects and “still restrictive monetary policy”.

While the direct impact of higher energy prices was already feeding through to household and business energy bills, policymakers said there was limited evidence so far of broader knock-on effects on prices and wages.

“However, the degree of inflationary pressure in the pipeline is now sufficient to warrant an increase in Bank Rate,” the MPC said.

Commenting on the decision, JPMorgan’s Allan Monks said the Bank was keeping its options open, although recent energy price movements had left oil and natural gas close to, or below, the BoE’s central assumptions.

Source: Bank of England Monetary Policy Report

The Bank's updated economic projections showed CPI inflation averaging 4.9% in Q2 2027 before gradually retreating towards its 2% target.

Despite the economy's resilience this year, staff expected growth to lose momentum in 2027 as higher inflation, tighter financial conditions and fiscal consolidation weighed on household real incomes and consumption.

Economic activity was projected to remain relatively robust in Q4, with growth of around 2.2%, before slowing next year.

On employment, policymakers acknowledged a modest improvement in labour market conditions towards the end of the summer, with unemployment expected to stabilise at around 4.8% in Q4.

Although there was little evidence of a broad-based wage-price spiral, the MPC warned that the scale of the energy shock, coupled with a stabilising labour market, had increased the risk of second-round inflationary effects.

Nomura’s George Buckley noted that the central bank had presented two alternative scenarios alongside its central forecast: one involving more persistent inflationary pressures and another reflecting weaker demand without significant second-round effects.

Under the adverse inflation scenario, illustrative interest-rate paths derived from the Bank's model-based projections and a non-energy Taylor-type rule were around 0.5–0.6 percentage points higher by Q4 2029 than under the central projection.

Conversely, the weaker demand scenario produced rate paths approximately 0.6–0.7 percentage points below the central projections.

Buckley said the scenarios highlighted the considerable uncertainty surrounding the outlook, particularly the extent to which higher energy costs feed through to domestic prices and wages.

At the subsequent press conference, Governor Andrew Bailey cautioned against interpreting November's decision as “the first of an inevitable long sequence of hikes”. However, he warned that unless the conflict in the Middle East was resolved, the latest increase was unlikely to be the last.

JPMorgan’s Monks maintained his forecast for a further increase in February, although he acknowledged that the Bank's latest guidance had opened the door to an earlier move.

“We remain comfortable with our view that the BoE will need to hike again in February. The meeting statement makes clear, however, that all meetings are live,” he said.

“That signals that December is in play, although without evidence of knock-on effects from energy we doubt they will go back to back.”

Much will depend on developments in the Middle East, the direction of energy prices and whether the inflation shock begins to feed into broader domestic price and wage pressures.

Nomura’s Buckley also doubted the MPC would deliver consecutive increases. However, with Mann already favouring a larger move and longstanding hawks Huw Pill and Megan Greene advocating tighter policy, he saw a reasonable prospect of further dissent in December.

“There is a good chance that one or both of them will join her in voting for a hike next month,” he posited.

For now, Nomura retained its forecast for one further 25-basis-point increase in February, taking the Bank Rate to a terminal level of 4.25%.

“We would need to see some scaling back of the conflict in the Middle East and a continuation of the very recent fall in energy prices for this peak in rates to prove sufficient,” concluded Buckley.