BoE to raise rates to 4% in November, but economists narrowly expect hold from there

Oct 15 (Reuters) - The Bank of England will raise Bank Rate for the first time in more than three years to 4.0% in November, according to a majority of economists polled by Reuters who have reversed course on the likelihood of a rate rise this year due to persistently high inflation. 

But there is still no majority among central bank watchers, who have been more guarded than financial market traders, for a further rate rise beyond next month. Markets are fully pricing in four quarter-point rate rises by the end of next year.

So far, hefty energy price rises stemming from the US-Israeli war with Iran that began in late February have not spilled into broader consumer price rises, although inflation has broadly been above the BoE's 2.0% target for more than five years. 

With the British economy consistently beating expectations, government bond yields on the rise, inflation at 3.1% and forecast to rise to roughly double the target and no sign of the war ending any time soon, most say it is now time to increase borrowing costs.

A strong majority – 54 of 63 economists polled between October 12 and 14 – forecast the BoE would raise Bank Rate by 25 basis points next month, which coincides with the central bank's next set of quarterly forecasts. 

In last month's survey, about 90% of respondents forecast rates to stay on hold for the remainder of the year.

Sonali Punhani, UK economist at Bank of America, who recently changed her view from hold to a hike, said: "The bigger pickup in inflation is still ahead of us rather than behind us."

"As a central bank, if you are heading towards inflation close to or above 4%, the risk-reward is probably leaning towards the direction of a hike versus a hold and hoping second-round effects don't come in," she said. 

GOVERNOR HAS HINTED AT RATE RISE

While the BoE was one of the first central banks to raise rates in the last cycle, others, including the European Central Bank and Federal Reserve, have already begun to lift borrowing costs. 

BoE Governor Andrew Bailey, who so far has been reluctant to cast a vote for a rate rise, dropped a clear hint at the last Monetary Policy Committee meeting that higher rates were likely on the way. 

"The conditions are now moving to a place where that rate hike will need to be delivered, at least according to the guidance that Governor Bailey gave," said Dani Stoilova, UK and Europe economist at BNP Paribas.

Still, there is no majority view among economists beyond the rate rise expected for November. Nearly half of economists polled, 30 of 61, expected one more rise in the first quarter of 2027.

BoE Chief Economist Huw Pill, who has been voting for a rate increase since April, again pushed back on Thursday against market expectations for a series of hikes. 

British inflation is forecast to average 3.6% this quarter and 3.8% next, and 3.0% for calendar year 2027. Those forecasts were all revised up from 3.3%, 3.2%, 2.5% in last month's poll.

Higher inflation expectations have driven a surge in government bond yields around the world in recent months, taking British government borrowing costs to their highest in decades ahead of the October 28 budget from finance minister John Healey. 

Healey should rebuild his depleted headroom against the fiscal rules to about £15-16 billion (£20-21 billion) at this month's budget to keep bond investors onside, according to a majority of economists surveyed.

The British economy put in the best growth performance among Group of Seven developed economies in the first half of the year. 

But economists have made only a modest upward revision to this year's growth forecast to 1.3%, up from 1.1%, but held their 2027 and 2028 forecasts at 1.2% and 1.5%.

(Other stories from the Reuters global economic poll)

(Reporting by Nushaiba Iqbal and Indradip Ghosh; polling by Shaloo Shrivastava and Indradip Ghosh; Writing by Ross Finley; Editing by Alex Richardson)