Bank of England set for first rate hike as energy shock worsens

The Bank of England is likely to raise rates for insurance against an energy-driven inflation surge, even though domestic wage and service-price pressures remain contained.

• ING expects a 25bp hike to 4% at the 5 November meeting, with a 7-2 vote, and considers a February follow-up more likely than not.
• Natural-gas prices have risen sharply, and regulated household energy bills are expected to increase by about 25% in January; headline CPI could peak slightly above 4% early next year.
• The Bank’s July projections had inflation reaching 3.2% in late 2026, based on oil below US$80 per barrel and natural gas at roughly half its current price, while private-sector wage growth is running at 3.4% year on year.
• The article argues that second-round effects are not yet evident: energy-intensive inflation has fallen this year, core services inflation is well behaved, and there is little evidence of accelerating wage pressure.
• More than 100bp of hikes are already priced, UK swap rates remain strongly correlated with oil, and sterling has benefited from rate expectations; EUR/GBP has fallen almost 4% in just over a month.

Takeaway: The BoE is expected to hike as an insurance measure rather than in response to broad-based domestic overheating, so further tightening will depend on evidence that energy prices are feeding into wages and price-setting; markets may have limited room to reprice materially higher.