London Daily

Focus on the big picture.
Thursday, Jan 01, 2026

Bank of England on track for second rate rise in under two months

Bank of England on track for second rate rise in under two months

Britain's central bank looks on course to raise interest rates next week for the second time in less than two months, reversing more of its COVID-19 pandemic stimulus, after inflation jumped to its highest in nearly 30 years.

Inflation has risen sharply across advanced economies, driven by higher energy prices and supply-chain difficulties. But the Bank of England has moved faster than other big central banks because of fears that costly energy and a tight labour market could see price pressures become entrenched.

Most economists polled by Reuters last week expect the BoE to raise rates to 0.5% on Feb. 3 from 0.25%. On Monday rate futures priced in an 87% chance of such a move.

"They need to do something in the short term to reinforce their credibility, anchor inflation expectations, and perhaps support sterling as well, to improve the inflation outlook," said Samuel Tombs, chief UK economist at consultants Pantheon Macroeconomics.

The BoE has not raised rates at two consecutive Monetary Policy Committee (MPC) meetings since June 2004.

A hike would also set the BoE's 875 billion pounds ($1.18 trillion) of government bond holdings on a downward path as it ceases reinvestment of maturing gilts.

Tombs brought forward his forecast for a BoE rate rise by a month after data last week showed consumer price inflation hit 5.4% in December, its highest since March 1992.

Inflation - which has overshot BoE forecasts over the past six months - is set to peak at more than 6% in April when regulated household energy bills rise by around 50% after the recent gas price surge.

BoE Governor Andrew Bailey said last week that inflation risked being more persistent than the BoE expected in November due to tensions between Russia and Ukraine. Futures markets showed natural gas prices staying higher for longer.

He added that firms were considering raising prices and wages this year in a way that would cause inflation to be too slow to fall back to its 2% target.

"The objective for monetary policy now should be to lean against this 'strong-for-longer' scenario," Catherine Mann, an external member of the MPC, said on Friday.

The other seven MPC members have said nothing publicly on policy this year, and a February rate rise is not definite.

The BoE wrong-footed markets in November when it kept rates on hold, triggering the sharpest weekly fall in bond prices since 2009. Its new chief economist, Huw Pill, later said markets should not expect detailed guidance on policy action.

NEW FORECASTS


The BoE will publish new growth and inflation forecasts on Feb. 3, replacing November ones which were quickly left out of date by higher-than-expected inflation and the Omicron variant.

Economists also want a sense of how much further the BoE thinks rates might rise, and if it might need to take them above 'neutral' to a tightening level.

In November, the BoE downplayed market expectations that rates might reach 1% this year. Now markets expect rates to hit 0.75% - their pre-pandemic level - in May and 1.25% by November.

Britain's wave of Omicron-related COVID-19 cases - which was surging when the BoE raised rates on Dec. 16 - is now less than half the peak of early January.

Economists reckon the financial damage has been mostly limited to sectors such as hospitality, leading to a roughly 0.5% hit to output over December and January.

Gross domestic product returned to its pre-pandemic level for the first time in November.

The job market has performed more strongly than the BoE expected, with unemployment close to pre-pandemic levels although there are around 600,000 fewer people in employment, as some older workers dropped out of the workforce.

This, combined with record-high job vacancies, is fuelling the BoE's concern about labour market pressures. Mann spoke of a potential 'regime change' compared with the 2010s when wage growth was weak, even when inflation spiked above 5% due to an oil price surge in 2011.

"Even though the recovery has not been particularly stellar, it does seem we are starting to hit supply-side constraints a bit sooner than other countries," Pantheon's Tombs said.

Brexit-related frictions and low business investment since the 2016 referendum probably lay behind this, he added, and he doubted that workers' bargaining power had strengthened much.

($1 = 0.7412 pounds)

Newsletter

Related Articles

0:00
0:00
Close
No UK Curfew Ordered as Deepfake TikTok Falsely Attributes Decree to Prime Minister Starmer
Europe’s Largest Defence Groups Set to Return Nearly Five Billion Dollars to Shareholders in Twenty Twenty-Five
Abu Dhabi ‘Capital of Capital’: How Abu Dhabi Rose as a Sovereign Wealth Power
Diamonds Are Powering a New Quantum Revolution
Trump Threatens Strikes Against Iran if Nuclear Programme Is Restarted
Apple Escalates Legal Fight by Appealing £1.5 Billion UK Ruling Over App Store Fees
UK Debt Levels Sit Mid-Range Among Advanced Economies Despite Rising Pressures
UK Plans Royal Diplomacy with King Charles and Prince William to Reinvigorate Trade Talks with US
King Charles and Prince William Poised for Separate 2026 US Visits to Reinforce UK-US Trade and Diplomatic Ties
Apple Moves to Appeal UK Ruling Ordering £1.5 Billion in Customer Overcharge Damages
King Charles’s 2025 Christmas Message Tops UK Television Ratings on Christmas Day
The Battle Over the Internet Explodes: The United States Bars European Officials and Ignites a Diplomatic Crisis
Princesses Beatrice and Eugenie Join Royal Family at Sandringham Christmas Service
Fine Wine Investors Find Little Cheer in Third Year of Falls
UK Mortgage Rates Edge Lower as Bank of England Base Rate Cut Filters Through Lending Market
U.S. Supermarket Gives Customers Free Groceries for Christmas After Computer Glitch
Air India ‘Finds’ a Plane That Vanished 13 Years Ago
Caviar and Foie Gras? China Is Becoming a Luxury Food Powerhouse
Hong Kong Climbs to Second Globally in 2025 Tourism Rankings Behind Bangkok
From Sunniest Year on Record to Terror Plots and Sports Triumphs: The UK’s Defining Stories of 2025
Greta Thunberg Released on Bail After Arrest at London Pro-Palestinian Demonstration
Banksy Unveils New Winter Mural in London Amid Festive Season Excitement
UK Households Face Rising Financial Strain as Tax Increases Bite and Growth Loses Momentum
UK Government Approves Universal Studios Theme Park in Bedford Poised to Rival Disneyland Paris
UK Gambling Shares Slide as Traders Respond to Steep Tax Rises and Sector Uncertainty
Starmer and Trump Coordinate on Ukraine Peace Efforts in Latest Diplomatic Call
The Pilot Barricaded Himself in the Cockpit and Refused to Take Off: "We Are Not Leaving Until I Receive My Salary"
UK Fashion Label LK Bennett Pursues Accelerated Sale Amid Financial Struggles
U.S. Government Warns UK Over Free Speech in Pro-Life Campaigner Prosecution
Newly Released Files Shed Light on Jeffrey Epstein’s Extensive Links to the United Kingdom
Prince William and Prince George Volunteer Together at UK Homelessness Charity
UK Police Arrest Protesters Chanting ‘Globalise the Intifada’ as Authorities Recalibrate Free Speech Enforcement
Scambodia: The World Owes Thailand’s Military a Profound Debt of Gratitude
Women in Partial Nudity — and Bill Clinton in a Dress and Heels: The Images Revealed in the “Epstein Files”
US Envoy Witkoff to Convene Security Advisers from Ukraine, UK, France and Germany in Miami as Peace Efforts Intensify
UK Retailers Report Sharp Pre-Christmas Sales Decline and Weak Outlook, CBI Survey Shows
UK Government Rejects Use of Frozen Russian Assets to Fund Aid for Ukraine
UK Financial Conduct Authority Opens Formal Investigation into WH Smith After Accounting Errors
UK Issues Final Ultimatum to Roman Abramovich Over £2.5bn Chelsea Sale Funds for Ukraine
Rare Pink Fog Sweeps Across Parts of the UK as Met Office Warns of Poor Visibility
UK Police Pledge ‘More Assertive’ Enforcement to Tackle Antisemitism at Protests
UK Police Warn They Will Arrest Protesters Chanting ‘Globalise the Intifada’
Trump Files $10 Billion Defamation Lawsuit Against BBC as Broadcaster Pledges Legal Defence
UK Says U.S. Tech Deal Talks Still Active Despite Washington’s Suspension of Prosperity Pact
UK Mortgage Rules to Give Greater Flexibility to Borrowers With Irregular Incomes
UK Treasury Moves to Position Britain as Leading Global Hub for Crypto Firms
U.S. Freezes £31 Billion Tech Prosperity Deal With Britain Amid Trade Dispute
Prince Harry and Meghan’s Potential UK Return Gains New Momentum Amid Security Review and Royal Dialogue
Zelensky Opens High-Stakes Peace Talks in Berlin with Trump Envoy and European Leaders
Historical Reflections on Press Freedom Emerge Amid Debate Over Trump’s Media Policies
×