The Bank of England is widely expected to leave its 3.75% Bank Rate unchanged on Thursday, even as inflation climbs well beyond its 2% target.
Markets are pricing in more than an 80% chance that the central bank holds steady at Thursday’s meeting, according to LSEG data, signaling a notable split from global peers.
A hold would represent a clear divergence from major central banks currently tightening monetary policy across the US, Europe, and Japan.
The US Federal Reserve announced a quarter-point rate hike on Wednesday, marking its first hike since 2023, while the European Central Bank delivered its second rate increase of the year last week.
The Bank of Japan is also expected to raise its key interest rate at the conclusion of its two-day policy meeting on Friday.
The Bank of England has not altered its key interest rate at any point this year, with its last move being a 25-basis-point cut in December.
UK consumer price inflation rose to 3.1% in August, the Office for National Statistics confirmed Wednesday, marking the first time the figure has exceeded 3% since March.
The ONS attributed the spike largely to rising motor fuel costs, which surged 23% year-on-year, reflecting the UK’s vulnerability as a net energy importer to external supply shocks.
Britain continues to grapple with a cost-of-living crisis rooted in post-Covid inflation and the ongoing impact of the Russia-Ukraine war on natural gas supplies.
Global inflation concerns and apprehension over UK fiscal policy have weighed heavily on British government bonds, known as gilts, pushing yields on long-dated 20- and 30-year gilts close to the 6% mark, the highest borrowing costs in the G7.
British newspaper The Telegraph reported earlier this week that the Bank of England would announce plans to stop selling 20- and 30-year gilts alongside its interest rate decision.
Scott Gardner, an investment strategist at J.P. Morgan Personal Investing, said the inflation increase was “unlikely to convince the Bank of England to hike interest rates just yet,” but could raise fresh concerns about the inflation outlook among policymakers.
“The US-Iran conflict began over six months ago but higher energy costs are still filtering through to business input prices and household spending,” Gardner said in a note Wednesday.
Shreyas Gopal, an FX strategist at Deutsche Bank, said the absence of materially hawkish surprises in both UK labor market and inflation data had been “enough for pricing for [hikes at] this upcoming meeting to fall back again.”
Despite Thursday’s expected hold, markets widely anticipate the Bank of England will move to raise rates by at least 25 basis points at its next scheduled meeting in November.
