BoE recap: A divided hike and a warning that the energy shock is not over

The Bank of England (BoE) raised its Bank Rate by 25 basis points to 4.00%, with eight policymakers backing the move and Catherine Mann preferring a larger 50-basis-point increase. The decision came as the BoE sharply lifted its inflation forecasts and warned that energy pressures could require further tightening.

The “Old Lady” now anticipates inflation to peak at roughly 5% in Q2 2027, up from its earlier prediction of 3.2% in late 2026. The CPI is not likely to recover to the 2% objective until Q3 2028, while under the Bank’s bad scenario inflation would rise to 6.2% if the energy shock worsens.

Governor Andrew Bailey said there was already enough inflationary pressure in the pipeline to warrant the rise. The current boost may not be the last, he cautioned, and the Middle East crisis may not be over. But he underlined it should not be taken as the start of an inevitable series of rate rises. The Bank still sees scant evidence of second-round impacts, but stronger-than-expected activity has bolstered the argument for tighter policy.

The economic picture is ambiguous: the BoE has lifted its growth predictions for the near-term and now sees GDP expanding by 1.6% in 2026, although growth is expected to drop to 1.3% in 2027 and 1.2% in 2028. Unemployment is likely to increase slowly but pay growth is now expected to be more than originally estimated. The government’s budget is predicted to dampen inflation briefly, but the impact is likely to be reversed later.

The message was broadly hawkish, but not a pledge to continue tightening. MPC members Lombardelli and Pill think there is a case for another hike in the near future, while Greene suggested further hikes would likely be needed. Bailey said existing policy was generally restrictive enough and that some of the increase in market-rate expectations was due to risk premia rather than the Bank’s predicted course. The MPC has hiked rates to guard against a worse inflation outcome, but has deliberately kept its next move open.