Bank of England Expected to Raise Rates to 4% in First Hike Since 2023

London, United Kingdom — The Bank of England is expected to raise interest rates on Thursday for the first time since August 2023 as surging energy costs lift British inflation, though it may signal that investors are overestimating how many more increases will follow in 2027, according to a report by Reuters.

Economists in a Reuters poll expect the central bank to take Bank Rate to 4.0% from 3.75%. When it last tightened policy, in August 2023, inflation was still running at more than three times its 2% target.

The Bank of England was criticized for underestimating how persistent inflation would prove during the previous energy-price surge. Reuters reported that it is keen to avoid repeating that mistake as global energy prices remain elevated. The sequence of policy moves has also shifted: the Bank was among the first major central banks to raise rates in the earlier cycle, but this time the U.S. Federal Reserve and the European Central Bank have moved first.

Governor Andrew Bailey has said the bank cannot wait for conclusive proof of second-round effects, the process by which higher inflation feeds into how wages and prices are set, because by then it will have acted too late. Last month, he also said businesses he had spoken to appeared to be absorbing higher costs more than they did in 2022.

The Monetary Policy Committee (MPC) remains divided over how much evidence is needed before raising rates and whether sustained energy-price pressures will feed into broader wage and price increases. In September, the committee voted 6–3 to keep rates unchanged.

The September minutes show that Megan Greene, Catherine L Mann and Huw Pill backed a 0.25 percentage point rise to 4%, while Bailey, Sarah Breeden, Swati Dhingra, Clare Lombardelli, Dave Ramsden and Alan Taylor voted to hold. At that point the committee had seen little sign of significant second-round effects, but warned that the risk would grow the longer energy prices stayed high or volatile.

Andrew Bailey, Governor of the Bank of England, said in September: “Today, we’ve held Bank Rate at 3.75%. But the longer this volatility persists, the bigger the impact it will have on inflation, and the more likely it is we will need to raise Bank Rate to ensure that inflation falls back to our 2% target.”

The bank also warned in September that inflation would climb above 4% early next year, and said the rise in energy prices since its July forecasts looked like what it calls its adverse scenario, one in which inflation could become entrenched. Its minutes recorded that spot Brent crude and UK wholesale gas prices had risen 36% and 78% respectively since the run-up to the July report, with Brent at $106 per barrel at the close on 14 September.

Prices have since outpaced the bank's projections. Consumer prices rose 3.5% in the 12 months to September, up from 3.1% in August and above the 3.0% the central bank had forecast in July.

Stefan Koopman, senior macro strategist at Rabobank, said: “In other words, their hands are increasingly being forced, whether they like it or not,” adding: “At some point, even a committee that would probably rather sit tight has to make good on at least some of what is priced (in the market). That time is now.”

The Reuters poll pointed to a 7-2 vote for a hike, with external members Taylor and Dhingra seen as the likeliest to keep voting for no change. Both have cited spare capacity in the economy as grounds for patience, although recent growth data has come in stronger than expected.

On the other side, Chief Economist Pill and external members Mann and Greene have criticized how the bank has handled the current episode. Even those hawkish policymakers may hesitate to back market pricing of three to four more quarter-point increases in 2027, which would leave Bank Rate between 4.75% and 5.0%, Reuters reported.

Alexander Harvey, UK economist at consultancy Oxford Economics, said: “While we don't expect a clear steer from the Committee on how many hikes they're planning, it's possible that the meeting minutes or Bailey ... signal that Bank Rate is unlikely to reach the level that is priced in by financial markets,” adding that statements from individual MPC members would give important clues to the outlook, especially those of the bank's internal members, whose views have been finely balanced.

Economists surveyed by Reuters last month were divided on whether more hikes would come after November's, in contrast with financial markets.

Mann has argued that aggressive bets on rate rises reflect a risk premium amplified by the bank’s wait-and-see approach, rather than clear signals that it would keep inflation under control. That could make Thursday’s guidance on future policy as closely watched as the rate decision itself.

Investors will also be looking for the bank's first assessment of the budget that finance minister John Healey delivered last week, which comes alongside new economic forecasts. Healey offered modest help to households and motorists squeezed by higher energy bills, paid for partly by a tax on banks, and economists judged that the package would do little to curb the projected increase in inflation.

The MPC meets eight times a year to set Bank Rate at the level needed to bring inflation back to the 2% target. The Bank of England will announce its decision at 1200 GMT on Thursday, 5 November, and Bailey and some of his deputies will hold a press conference at 1230 GMT.