Key facts
- The Bank of England is expected to raise rates on Thursday, its first increase since August 2023, Reuters reported.
- ING economists said the worsening energy crisis has made it much harder for the Bank of England not to act.
- ING said it expects UK inflation to rise above 4% early next year from the current 3.5%.
- Money markets were fully pricing four 25-basis-point BoE rate hikes by next September, per LSEG data.
- ING said a follow-up BoE hike in February is likely but that market pricing for hikes looks extreme.
The pound was broadly steady against the dollar and euro on Monday, November 2, as investor attention moved from last week's UK budget to an expected Bank of England rate increase on Thursday, which would be the central bank's first since August 2023, Reuters reported.
The European Central Bank and Federal Reserve have already raised interest rates this year to counter inflationary pressure from an energy price rise tied to the Iran war, while the BoE has followed a wait-and-see approach. ING economists and strategists said the Bank had argued it was on an "active hold" and that simply not cutting rates as previously planned amounted to de facto tightening.
"But the worsening energy crisis has made it much harder for the Bank not to act," ING said, adding that it expects UK inflation to rise above 4% early next year from the current 3.5%. BoE policymakers have repeatedly said the likelihood of a hike grows the longer energy prices stay elevated.
Brent crude futures hit multi-month highs last week and, although they were last down roughly 4.5% on Monday as optimism about a diplomatic resolution to the Middle East conflict grew, they were still at $108.37 a barrel, far above pre-Iran war levels. The drop in oil prices slightly lifted risk appetite in currency markets, which weighed on the dollar.
Sterling was last slightly higher against the dollar at $1.3417 and dipped to 83.53 pence against the euro, which strengthened against the weaker dollar. ING said a follow-up BoE hike in February is also likely but that market pricing for BoE rate hikes "looks extreme." Money markets were last fully pricing in a total of four 25-basis-point rate hikes by next September, according to LSEG data.
The week's central bank action follows British finance minister John Healey's first budget last week. His spending plans held no surprises, and neither the pound nor gilts reacted strongly.