Bank of England delivers first rate hike in three years, gilt yields rise

LONDON, Nov 5 (Reuters) - The Bank of England raised interest rates for the first time in over three years on Thursday and warned that at least one more increase was likely if the US-Iran conflict continues.

The central bank's Monetary Policy Committee (MPC) voted 8-1 to raise rates to 4% from 3.75%, but in contrast to expectations in a Reuters poll, the dissent came not from a policymaker seeking to keep rates on hold but one seeking a bigger hike.

Sterling was little changed on the day at around $1.3468 versus around $1.3453 earlier . It stood at 83.29 pence per euro, a touch firmer on the day.

UK bond or gilt yields rose, with rate-sensitive two-year yields up around 3 basis points at 4.77%. London's blue-chip FTSE stock index was last up 0.7%<.FTSE>

Traders raised their bets on more BoE rate hikes, pricing in around 76 bps of further tightening by the end of 2027, compared to roughly 67 bps before the decision.

COMMENTS:

PIOTR MATYS, SENIOR FX ANALYST AT IN TOUCH CAPITAL MARKETS:

"Sterling appreciated in a knee-jerk reaction to the BoE delivered a hawkish 25bps hike. Not only it was unanimously supported by policymakers, but there was a motion for a 50bps move."

MICHAEL METCALFE, HEAD OF MACRO STRATEGY, STATE STREET, LONDON:

"This is a relatively hawkish outcome. The fact that you've got a dissent for a larger hike, (BoE Governor Andrew) Bailey saying very clearly that more rate hikes will be required if energy prices persist, some degree justifying pricing that's in the market for further hikes.

"Obviously the longer the energy shock lasts and the more transmission you get into headline inflation, then the more likely it is that you need to take some insurance. It's a question of timing.

"Clearly rates will need to go up again if energy prices stay high, but it's a question of how many times. And I think that's going to be the question that will drive sterling and interest rate markets in the coming weeks."

"It seems pretty clear that we are going to get, at the very minimum, at least one more tightening, that means fully priced now for February as it's unlikely that we get another hike this year. Once we get that hike done in February, we'll have to see whether the energy price shock is persisting."

NEIL WILSON, UK INVESTOR STRATEGIST, SAXO, LONDON:

"My read, this was hawkish. Consensus hike and strong signal for another one soon, with market odds for a Dec hike up from 1 in 4 to closer to 50/50, with three further hikes through to September next year being pencilled in. The Bank now sees inflation peaking at 4.9% in 2027, a fairly hawkish assessment of the path of prices that seems to suggest it's eyeing a second hike as early as December. Whether that's the end of a shallow hiking cycle depends on events in the Middle East".

VIVEK PAUL, UK CHIEF INVESTMENT STRATEGIST, BLACKROCK INVESTMENT INSTITUTE, UK

"Economic growth is proving resilient and the labour market is steadying. And so the risk of higher energy costs feeding through to wages and other prices has increased. Yet, even with today’s vote being more hawkish than expected, we think markets are pricing in too many rate hikes. For now, we only see room for one more hike over the next year compared with the three implied by markets. Much depends on how the Middle East energy shock spreads through the economy."

LALE AKONER, GLOBAL MARKET STRATEGIST, ETORO, UK:

"Governor Andrew Bailey has signalled that another increase may be needed, but cautioned against expecting a prolonged series of hikes.

"Markets have been pricing in rates reaching around 4.75% to 5%, yet the Bank’s forecasts suggest inflation would fall below its 2% target in 2029 under that path. This raises the possibility that fewer increases will ultimately be necessary.

"If investors begin to scale back their expectations, UK government bonds could benefit as yields fall, while lower borrowing costs could eventually support sectors such as housebuilders, property and consumer-facing businesses. Sterling, which has rallied against the dollar and euro this week, could face pressure if expectations for further tightening ease."

MADISON FALLER, GLOBAL INVESTMENT STRATEGIST, J.P. MORGAN PRIVATE BANK, LONDON:

"The UK started the year with one of the highest policy rates in the developed world, and when combined with fiscal tightening and labour market vulnerabilities, that made for a credible case that financial conditions were already pressing the brakes. That gave the (Monetary Policy Committee) room to wait, watch, and assess.

"That room has since narrowed. Inflationary pressure has continued to build, and growth has been more resilient than anticipated. This begs the question of whether policy is truly restrictive, while demand for further hikes has been building. But today’s move still feels like a measured, credibility-preserving one rather than the start of an aggressive cycle. Inflation is elevated, but the evidence that it is broadening beyond energy remains mixed, and further stabilization in energy prices would reinforce that view. On balance, more hikes may be needed, but the data likely needs to demand it."

NEIL BIRRELL, CIO, PREMIER MITON, LONDON:

"As expected, the Bank of England raised the base rate and there can be little doubt that there will be more in the first half of next year, it’s simply about when and how many. The fall we have seen in the oil price is obviously welcome news, but high energy prices are baked into the system now. The Bank, like all major central banks, faces a significant challenge in not falling behind the curve, or getting ahead of it, when balancing the risks between beating inflation and not stymieing growth."

ED HUTCHINGS, HEAD OF RATES, AVIVA INVESTORS, LONDON:

"Today’s BoE decision to raise interest rates was fully expected, and with inflationary concerns remaining elevated, further hikes look increasingly likely, even if these are characterised as simply ‘insurance hikes’.

"The MPC will have growing worries over second round effects and will likely want to get ahead of this, especially so ahead of the New Year wage settlements."

DAVID REES, CHIEF ECONOMIST, SCHRODERS, UK:

"The Bank of England has been reluctantly dragged into a global hiking cycle driven by imported energy inflation. But this is not the start of an aggressive tightening campaign. Ultimately domestic inflation remains relatively well behaved, and there is still slack in the economy.

"While growth and labour-market data have improved recently, we think UK interest rates will peak at 4.25% - well below the path currently priced by markets."

SUSANNAH STREETER, CHIEF INVESTMENT STRATEGIST, WEALTH CLUB, UK:

"A hike was widely expected, so it hasn't set off fireworks on financial markets, but it will give borrowers a shiver as budgets become stretched in the year ahead.

"The cold reality of an era of higher interest rates is hitting home, with three further rate hikes being priced in by financial markets."

(Reporting by the Reuters Markets Team; Compiled by Dhara Ranasinghe; editing by Alun John)