Bank of England expected to raise interest rates for first time in three years today – business live
The Bank of England is set to raise its main interest rate to 4% for the first time in more than three years, responding to persistently high inflation.
The Bank of England will lift its main interest rate to 4% at noon, ending a pause that began in August 2023. A quarter-point rise would take Bank Rate up to 4% from 3.75%, a move expected to be approved by a wide margin of the nine-member Monetary Policy Committee.
The decision comes as inflation remains above the bank’s 2% target, driven by higher energy costs and more hawkish macro data. The BoE has been playing catch-up with other major central banks, which have already tightened policy this year.
The move is widely anticipated by markets, with a hike to 4% fully priced in. The bank is primarily responding to higher energy prices, but macro data have also turned more hawkish.
The BoE is primarily responding to higher energy prices, but macro data have also turned more hawkish. Growth has been resilient, the labour market has stabilized, and core inflation has edged higher. However, the economy does not look overheated, and pass-through from higher energy prices into core inflation has been modest overall.
Traders are also watching geopolitical developments, with oil prices tumbling to their lowest level in two months. Brent crude crashed through the $100 a barrel mark yesterday and is trading around $95 a barrel this morning.
The drop in oil prices reflects a shift in market sentiment following the midterms, as traders conclude that Donald Trump might try to de-escalate the Middle East conflict. However, analysts warn that peace talks are currently only rhetorical.
Peace talks are in rhetoric alone currently. Meanwhile, it’s feared an increasingly lame-duck President Trump could become more active (and arguably reckless) in foreign policy as he seeks to influence policy at a time when there are fewer self-interested reasons to show restraint. For now, market participants are pricing out the geopolitical risk premium that had been baked into the market leading into the midterms on fears the US would launch fresh strikes after the election.
The BoE’s decision will be closely watched for signals on the future path of monetary policy. A press conference is scheduled for 12.30pm GMT, followed by the release of US jobless claims data at 1.30pm.
Policy split expected
Most of the BoE’s nine policymakers are expected to vote in favour of the hike, with only one dissenting. The decision is expected to be almost unanimous, with an 8-1 vote in favour.
We expect an 8-1 vote in favour of the move, with only Alan Taylor dissenting. Although several rate setters will vote for the hike reluctantly, developments in the real economy justify it. Strong economic growth and a tentative stabilisation of the labour market suggest that an interest rate hike will restrain economic activity only modestly.
The BoE will also be monitoring the impact of higher borrowing costs on the UK economy. Strong economic growth and a tentative stabilisation of the labour market suggest that the hike will restrain activity only modestly.
Market reaction
The pound is expected to be volatile in the wake of the decision. Traders are also watching for clues on the bank’s future policy path, particularly whether the hike signals a more aggressive tightening cycle.
The BoE’s move comes as other major central banks have already tightened policy this year.
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