As expected the Bank Of England has decided to raise key interest rate by 25 pbs to 4% in 8-1 vote. One member voted to increase Bank Rate by 0.5 percentage points, to 4.25%. Key points:

• BoE has raised Bank Rate by 0.25 percentage points to 4%
• Conflict in the Middle East has disrupted the transportation and supply of energy, raising its price and pushing up households’ motor fuel costs and utility bills
• Inflation has risen to 3.5% and we expect it to rise even further to about 5% by mid-2027 as higher energy prices have their knock-on effects; higher bills could force businesses to increase their prices to cover the cost, for example
• So far, there is little evidence of significant knock-on effects on other prices and wages; but energy costs have been high for long enough now that we expect those knock-on effects to eventually kick in
• The economy has been more resilient and activity has been stronger than expected – this is good news, but it adds to the risk that higher energy prices affect other prices; so, we must act now to reduce their impact
• Traders add to BoE rate bets, see 50% chance of a hike in December (before decision it was 35%)

Bank of England policymakers struck a broadly hawkish tone after Thursday’s rate hike, with Governor Andrew Bailey saying it was unlikely to be the last increase unless the Iran war is resolved. Deputy Governor Clare Lombardelli said there was likely to be a case for more hikes in the near term, while Chief Economist Huw Pill said a single 25 basis-point move was unlikely to be sufficient and Dave Ramsden said he was now less confident about domestic disinflation. Catherine Mann went further, saying a 50 basis-point hike would have been “good policy” for credibility as the economy was now in a world of more robust second-round effects, and Megan Greene warned that inflation was at a level that could push up pay settlements in 2027–28. Sarah Breeden said any further hike would depend on how energy prices propagate through the economy. On the dovish side, Alan Taylor said markets must understand this was a one-off “insurance” hike rather than the start of a hiking cycle, while Swati Dhingra said she would need clear evidence of firms’ pricing power before backing further increases.

The GBPUSD pair saw some bullish reaction to the BoE decision and further comments included with post- decision report.Source: XTB