A hike on November 5 would extend the energy-driven tightening seen across central banks. Any guidance pointing to a February follow-up would likely support sterling, particularly against currencies where central banks are seen as slower to respond. Gilts look the more vulnerable asset: 10-year UK yields already sit at the top of the G7 range, and further tightening alongside reduced fiscal headroom ahead of the Budget could keep pressure on longer-dated debt. For equities, higher rates and energy costs weigh on domestically focused UK stocks, while the FTSE 100’s energy-heavy constituents offer some offset. Oil and gas remain the key swing factor: with household energy bills driving the expected rise in inflation, any further spike in prices linked to the Middle East war would strengthen the case for a longer hiking cycle.
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Earlier:
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MUFG says the Bank of England cannot look through this energy shock the way it might like, because the UK economy is simply too strong to make waiting look safe.
Summary:
The Bank of England is likely to raise interest rates at its next meeting, as higher energy prices push UK inflation back above 4%, according to MUFG, which expects a further increase in February.
In its European macro and market outlook, MUFG said it expects a 25 basis point hike at the Bank of England’s next policy decision, due on November 5, followed by another in February, taking Bank Rate to a terminal level of 4.25%. The bank said energy prices have remained elevated for longer than anticipated and have moved higher in recent months. As those costs feed through to household bills, it expects headline inflation to rise above 4%.
MUFG argued that the Bank of England will struggle to look through the energy shock, as it might otherwise, because of the wider economic backdrop. The labour market is stabilising, growth is healthy and underlying inflation remains elevated. Services inflation measures are still running well above the Bank’s 2% target.
The UK economy has been notably resilient. MUFG said recent activity data have consistently surprised to the upside, and the economy does not appear to be repeating the second-half slowdowns of recent years, with third-quarter GDP tracking at about 0.65% quarter on quarter. It forecasts growth of 1.5% in 2026 and 1.4% in 2027, more optimistic than the IMF, despite energy-related headwinds.
That growth is fairly narrow, however, led by professional services and other knowledge-intensive sectors. MUFG said it is too early to draw firm conclusions, but the UK’s comparatively rapid adoption of artificial intelligence could help explain recent productivity gains. The share of UK job postings mentioning AI has risen faster than in the US or major European economies.
The fiscal backdrop is a complicating factor. MUFG estimates that higher borrowing costs may have reduced the government’s headroom against its fiscal rules to around £15 billion. It expects the upcoming Budget to include some offsetting tax measures alongside temporary, targeted support for households facing higher energy bills. MUFG questioned whether reducing fiscal buffers is prudent while growth holds up and geopolitical uncertainty remains high.
The Bank of England’s decision is due at 12:00 GMT (07:00 US Eastern time) on November 5.
This article was written by Eamonn Sheridan at investinglive.com.
Source: Investing Live - Central Bank
