London Daily

Focus on the big picture.
Friday, Jul 24, 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
Badenoch Rejects Grant Shapps' Bid to Return as Conservative Candidate
BAE Chief Warns Britain Has Underestimated the Risk of War
Burnham Rules Out New Scottish Independence Referendum in First Talks With Swinney
UK Government Strengthens Northern Economic Agenda Through Manchester Headquarters and Regional Partnerships
United Kingdom Opens New Furness Peninsula Coastal Route Under King Charles the Third England Coast Path
England Reduces Business Costs for Hospitality Sector Through New Relief Package
United Kingdom Allocates Seven Point Three Million Pounds for Zero-Emission Aviation Research
United Kingdom Begins Restoration Works on Portishead Railway Line After Six Decades Without Passenger Services
United States Tariff Measures Create New Trade Challenges for United Kingdom and European Union Businesses
Prime Minister Andy Burnham Meets Scottish and Welsh Leaders to Promote Regional Growth Cooperation
United Kingdom Government Announces Twenty Percent Business Rates Cut for Pubs, Clubs, and Music Venues
Prime Minister Andy Burnham Opens Manchester Government Headquarters to Shift Decision-Making Away From Westminster
United Kingdom Defence Ministry Says Armed Forces Ready After Iran Accuses London Over US Military Strikes
United Kingdom Inflation Falls to Two Point Six Percent as Prime Minister Andy Burnham Gains Economic Breathing Room
OpenAI Sued After ChatGPT Allegedly Discouraged Emergency Care Before Near-Fatal Embolism
Viral Video Raises Questions Over Twelve-Dollar Croissants at Manhattan Bakery
UK Balances Security Commitments With Economic Growth Priorities
Retail and Hospitality Sectors Navigate Consumer Caution and Tax Changes
Key Trends to Watch
British Land Appoints Joanne McNamara as New Chief Executive Officer
UK Government Names New Life Peers Including Former Military and Civil Service Leaders
Institute of Directors Urges Government Action on Employment Costs and Skills Shortages
IMF Raises UK 2026 Growth Forecast to One Percent
UK Retail Sales Growth Slows Sharply as Households Cut Discretionary Spending
UK Ten-Year Bond Yields Remain Above Five Percent as Government Faces Higher Debt Costs
UK Government Plans Earlier End to Low-Value Import Duty Exemption for Online Retail Parcels
Reform UK Leads Tight Westminster Voting Poll as Conservatives and Labour Remain Close
Royal Navy Carrier Strike Group Completes First Arctic and North Atlantic Mission Phase
Andy Burnham Government Cuts Business Rates for Pubs and Music Venues by Twenty Percent
UK Inflation Falls to Two Point Six Percent in June as Food and Fuel Prices Ease
Andy Burnham Becomes UK Prime Minister Facing Growth Challenges and Fiscal Pressure
UK Government Reviews Long-Term Balance Between Cost Relief, Industry Support, and Public Investment Priorities
BBC Could Receive Permanent Royal Charter Under Government Proposal
Northern Ireland Proposes End to Severe Weather Exemptions for Electricity Compensation Rules
Andy Burnham Holds Talks With UK Devolved Leaders on Regional Cooperation and Devolution
House of Lords Launches Inquiry Into Risks Facing UK Democratic Institutions
ScottishPower Renewables Plans Major Rebuild of Whitelee Wind Farm With Fewer Larger Turbines
UK and Italy Leaders Discuss Global Combat Air Programme and Future European Cooperation
UK Government Announces Six Hundred Million Pound Aerospace Investment Package at Farnborough Airshow
European Union Approves UK Participation in Ninety Billion Euro Ukraine Support Loan Framework
Rolls-Royce Warns UK Government Over Jet Engine Funding Decision and Future Manufacturing Plans
UK Inflation Falls to Two Point Six Percent in June as Fuel and Food Prices Ease
Andy Burnham Begins Premiership With Two Pound England Bus Fare Cap and Electricity Tax Cut Plan
YouGov Poll Shows Tight Competition Among UK Political Parties
Space Technology Investment Expands Through UK-US Cooperation at Farnborough Airshow
UK Opens Final India Young Professionals Scheme Ballot for Three Thousand Applicants
United Kingdom Approved for Ukraine Financial Support Initiative With EU Partners
UK and Ireland Leaders Discuss Security, Energy and Regional Cooperation
British Heart Foundation Identifies Ten UK Areas With Severe Shortages of Defibrillators
Former Southern Water Executives Charged Over Alleged Water Test Manipulation Scheme
×