London Daily

Focus on the big picture.
Monday, Jan 05, 2026

Bank of England set to raise rates again as inflation heads for 10%

Bank of England set to raise rates again as inflation heads for 10%

The Bank of England looks set to raise interest rates next week for the fifth time since December, its steepest run of rate hikes in 25 years, and is likely to keep going in the coming months as inflation heads for double digits.

While Britain is forecast to have the weakest economy in 2023 among the world's big, rich nations, investors and most economists are predicting a quarter-point rate hike by the BoE next Thursday.

That would take Bank Rate to 1.25%, its highest level since January 2009, when Britain's economy was holed by the global financial crisis.

While historically low, expectations for British borrowing costs over the next couple of years have risen sharply recently and they jumped again this week when the European Central Bank flagged rate hikes at its next two meetings, including a possible half percentage-point rise in September.

Investors are betting on the BoE's Monetary Policy Committee doubling Bank Rate to 2% by September and hitting 3% by March next year. Some economists are ramping up their forecasts too.

Sanjay Raja at Deutsche Bank said on Friday he now expected rates to peak at 2.5%, up from a previous call of 1.75%, starting with a 0.25% increase next week.

"We don't expect a unanimous decision, however. Instead, risks are skewed to a more split MPC, with at least three members on the committee looking for a bigger 50 basis-point move," he said in a note to clients. "There's also a possibility of an even messier vote, with one or two members looking for no change to the Bank Rate."

FIRST MOVER


The BoE was the first big central bank to start reversing its pandemic stimulus in December, before the U.S. Federal Reserve and others began to move to head off the jump in inflation caused by the reopening of the world economy after the coronavirus pandemic and then Russia's invasion of Ukraine.

But that did not stop British inflation hitting a 4-year high of 9% in April, almost five times the BoE's 2% target.

The BoE thinks inflation is set to surpass 10% later in 2022, when regulated energy tariffs are due to jump by a further 40%, and consumers have already reined in their spending while there are signs of a slowdown in the housing market.

Governor Andrew Bailey said in April the BoE was walking a very tight line between tackling the surge in prices and causing a recession. But with wage deals starting to climb, the BoE's priority is to show it means business on fighting inflation.

A BoE survey published on Friday showed the public's expectations for inflation in the year ahead at 4.6%, the highest in records going back to 1999.

Since the central bank's last meeting in May, finance minister Rishi Sunak has given more money to households to soften the cost-of-living squeeze, reducing the risks of a recession and potentially increasing inflation pressures.

Billions of pounds of further support are expected from Sunak later this year as Prime Minister Boris Johnson fights for his political life after 41% of Conservative Party lawmakers voted to oust him on Monday.
There is also the risk of an escalation in a post-Brexit trade dispute between Britain and the European Union which could also fan inflation.

Paul Dales, an economist with Capital Economics, said investors were under-estimating the chance of a half-point rate hike by the BoE next week, especially if economic growth and labour market data due on Monday and Tuesday are strong.

"Either way, we think it will be very close with the MPC either voting 5-4 for a 50 basis point hike or 5-4 for a 25 basis point hike," he said in a note to clients.

Markets on Friday were pricing in a 30% chance of a half-point move by the BoE on June 16.

Newsletter

Related Articles

0:00
0:00
Close
HSBC Leads 2026 Mortgage Rate Cuts as UK Lending Costs Ease
US Joint Chiefs Chairman Outlines How Operation Absolute Resolve Was Carried Out in Venezuela
Starmer Welcomes End of Maduro Era While Stressing International Law and UK Non-Involvement
Korean Beauty Turns Viral Skincare Into a Global Export Engine
UK Confirms Non-Involvement in U.S. Military Action Against Venezuela
UK Terror Watchdog Calls for Australian-Style Social Media Ban to Protect Teenagers
Iranian Protests Intensify as Another Revolutionary Guard Member Is Killed and Khamenei Blames the West
Delta Force Identified as Unit Behind U.S. Operation That Captured Venezuela’s President
Europe’s Luxury Sanctions Punish Russian Consumers While a Sanctions-Circumvention Industry Thrives
Berkshire’s Buffett-to-Abel Transition Tests Whether a One-Man Trust Model Can Survive as a System
Fraud in European Central Bank: Lagarde’s Hidden Pay Premium Exposes a Transparency Crisis at the European Central Bank
Trump Announces U.S. Large-Scale Strike on Venezuela, Declares President Maduro and Wife Captured
Tesla Loses EV Crown to China’s BYD After Annual Deliveries Decline in 2025
UK Manufacturing Growth Reaches 15-Month Peak as Output and Orders Improve in December
Beijing Threatened to Scrap UK–China Trade Talks After British Minister’s Taiwan Visit
Newly Released Files Reveal Tony Blair Pressured Officials Over Iraq Death Case Involving UK Soldiers
Top Stocks and Themes to Watch in 2026 as Markets Enter New Year with Fresh Momentum
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
×