“Unless the conflict in the Middle East is resolved,” it “seems” like the Bank of England might have to raise rates again.
So said Andrew Bailey on Thursday when the BoE hiked for the first time in more than three years and projected a sharp rise in inflation through mid-2027.
The vote for a hike was unanimous. The only dissent, from Catherine Mann, was for an even larger, 50bps increase.
As the figure reminds you, the 2020s have been a rollercoaster for the BoE, which was forced into a Meru Shark’s Fin-steep series of hikes in rapid succession. The comically panicked tightening campaign, which overlapped Liz Truss’s star-crossed, 49-day tenure at No. 10, brought Bank Rate to 5.25%, the highest since March of 2008.
Earlier this year, the bank was widely expected to resume rate cuts after a pause, but the war in Iran was a gang aft agley moment. In February, the MPC was one vote away from cutting and said inflation would likely slip back below target soon. Then came the war.
On Thursday, in the new forecasts, the BoE said inflation’s likely to approach 5% midway through 2027. Energy bills will jump by a quarter at the turn of the year and then again in April, as dictated by the Ofgem price cap.
All in, “direct” effects from energy prices are seen contributing nearly 1.5ppt to overall CPI inflation during Q1 of 2027, which the bank noted on Thursday is “significantly more than anticipated in July.”
“While the direct effects of higher energy prices are clear, and will continue to feed into firm and household energy bills, there remains limited evidence of knock-on effects on other prices and wages,” Thursday’s policy statement said. “However, the degree of inflationary pressure in the pipeline is now sufficient to warrant an increase in Bank Rate.”
Traders dialed up expectations for hikes, with December seen as a coin flip for another move and 75bps of additional tightening tentatively priced for 2027.
Oh, and if you’re curious, the bank said that in the event the war in Iran were to escalate and persist, headline UK inflation could exceed 6% in Q3 of next year.
