Bank of England poised to hike rates for first time in 3 years

By David Milliken

LONDON, Nov 5 (Reuters) - The Bank of England is widely expected to raise interest rates for the first time in three years on Thursday due to mounting inflation pressures from the US-Iran war, taking a path already embarked on by all its main peers.

Economists polled by Reuters expect the BoE's Monetary Policy Committee to vote 7-2 to raise Bank Rate to 4% from 3.75% — the first increase since August 2023, when inflation was over 6%, and the first change in rates since a cut last December.

"I think they will have pushed through with a hike," said Hetal Mehta, chief economist at wealth managers St James's Place. A pickup in energy prices a couple of months ago and more recent signs of resilient economic growth are likely to have tipped the balance on the MPC, she added.

At the BoE's last meeting in September there was a 6-3 majority in favour of keeping rates on hold. Last month Governor Andrew Bailey said businesses appeared to be absorbing higher costs much more than in 2022, when inflation hit 11% after Russia's full-scale invasion of Ukraine.

DRAWN-OUT IRAN CONFLICT MAKES IT HARDER TO KEEP RATES STEADY

But the longer the US-Iran conflict continues — keeping the price of oil around $100 a barrel and natural gas prices triple their level before the conflict — the greater the chance these price increases seep more broadly through the British economy.

Inflation in September rose more than economists had expected to 3.5%, well above the BoE's 2% target and the 3% it had predicted in late July in its last full set of forecasts, which came after a temporary lull in the US-Iran conflict.

Britain's economy has also proven more resilient than expected, possibly due to spending on artificial intelligence. Gross domestic product in August showed the biggest annual rise since 2022 and in the first half of the year it recorded the joint-fastest expansion in the Group of Seven.

However, so far there have been few signs of significant "second-round" effects of inflation on wage deals, with businesses predicting annual wage settlements of around 3.5% for next year, similar to 2026.

Finance minister John Healey's first annual budget last week did little to shift the outlook for growth or inflation either.

BOE SPLIT ON SCALE OF INFLATION THREAT

BoE policymakers have been split on whether they want at least preliminary signs of second-round effects before hiking rates, or if that risks delaying a rate rise too long to curb inflation, which has exceeded target for almost all of the past five years.

Bailey has justified keeping rates on hold so far by pointing to a sharp rise in market interest rates after the conflict as investors ditched prior expectations of BoE rate cuts this year, pushing up mortgage rates more than elsewhere.

But some MPC members such as Catherine Mann worry that part of the rise in rate expectations reflects concerns that the BoE could lose control of inflation.

Financial markets currently price in at least three quarter-point rate rises for next year, on top of one this month, which would take British interest rates above those projected for the United States.

Previous market expectations of aggressive BoE rate hikes have proved premature, however, and most economists expect much more modest tightening.

Peder Beck-Friis, an economist at PIMCO, which manages more than $2 trillion in assets, said he only expected one BoE rate hike next year, in February, and then a prolonged hold, especially as the British economy appears weaker than that of the US.

"Without strong second-round effects on core inflation, we see this tightening as a risk-management calibration," he said.

(Reporting by David MillikenEditing by Gareth Jones)