Update 1 - Barclays supports Bank of England's rate hike in November and warns that the Middle East conflict may trigger further increases

Full update, including background information and analyst commentary

Reuters, September 18 - Barclays expects the Bank of England will raise rates by 25 basis points in November after policymakers keep rates unchanged, citing a “dramatic shift” in the medium-term energy outlook, and warns that a prolonged Middle East conflict could lead to further tightening of monetary policy.

Barclays shares this outlook with JPMorgan (link), which also expects rate hikes in November 2026 and February 2027 and warns the Middle East crisis could lead to further rate increases. Previously, JPMorgan predicted the Bank of England would raise rates once in November 2026, followed by two rate cuts in 2027.

The Bank of England kept rates (link) unchanged at 3.75% as expected on Thursday, but also projected inflation could surpass 4% at the start of next year. The meeting minutes revealed a more hawkish tone, suggesting the Bank may follow in the footsteps of Europe (link) and the US (link) by raising borrowing costs.

On Thursday, Saudi Arabia and Iran-backed Houthi militants in Yemen exchanged fire at the border, further escalating tensions in the Middle East. Meanwhile, since the temporary agreement reached in June broke down in recent weeks, the US and Iran have not held any peace talks.

Barclays’ strategist team led by Jack Meaning noted in a report on Thursday that if the Middle East conflict persists, they see room for another quarter-point hike in February 2027.

According to data from London Stock Exchange Group (LSEG), the market currently puts the probability of a Bank of England rate hike in November at 63%, with expectations for another hike in December.

The Bank of Japan (link) also raised rates on Friday to their highest level in 31 years and stated it is prepared to continue pushing up borrowing costs, as the ongoing Middle East conflict adds to global inflationary pressures.

However, Goldman Sachs, which also expects a November rate hike, points out that softening economic data or falling energy prices could prompt policymakers to hold off.

Morgan Stanley believes rates could remain unchanged for a longer period, though persistent pressures from commodity prices may lead to hikes in November and February.

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