Inflation shock combined with economic resilience! Bank of England sends its strongest hawkish signal in over three years, November rate hike imminent

According to Zhitong Finance APP, the natural language processing model BOESPEAK, which tracks statements made by members of the Bank of England's Monetary Policy Committee (MPC), shows that the central bank officials are sending out the most hawkish signals in more than three years, paving the way for a possible interest rate hike as early as next month.

BOESPEAK model shows a shift in the Bank of England MPC's stance

It is reported that after a series of speeches by Bank of England officials during recent International Monetary Fund (IMF) and World Bank meetings, the BOESPEAK index rose to its highest level since early 2023. Since the end of August, the index has surged sharply. Although it has slightly retreated from its peak, it remains near the highest level since March 2023, when the UK's inflation rate was as high as 10%, interest rates stood at 4%, and were still rising.

In response, economist Dan Hanson commented: "The rise in the index is striking, and it coincides with the recent surge in energy costs." He expects the Bank of England to raise rates in November and again in February next year. He added: "Of course, the MPC could merely be sending out tough signals. However, we believe that the risk balance surrounding economic growth and inflation prospects has shifted enough that a majority of Committee members are convinced higher rates are needed."

Unlike the Federal Reserve and European Central Bank, the Bank of England has not yet tightened monetary policy in response to the inflationary shock worsened by conflict in the Middle East. However, a growing number of Bank of England officials are warning of potential second-round effects of inflation, where companies pass on rising costs to consumers while employees demand higher wages.

Investors currently see the probability of a Bank of England rate hike next month at nearly 100% and expect at least three more hikes before July next year. A recent survey shows economists generally expect rate increases in November and February.

Currently, markets expect the Bank of England MPC to support raising rates by 25 basis points to 4% on November 5, marking the first in a series of increases before next summer. In September, the Committee voted 6 to 3 to keep rates unchanged, so only two members changing their stance would be enough to reverse the outcome.

Bank of England Governor Andrew Bailey is the key swing vote within the MPC. While Bailey has said there is no obvious evidence of second-round inflation effects yet, he warned that it is becoming increasingly difficult to avoid raising rates as energy shocks and the Middle East conflict drag on. His two deputies, Dave Ramsden and Clare Lombardelli, have used similar language, while there is still no end in sight to the Middle East war.

Earlier this month, Catherine Mann stated that the UK labor market is "static" rather than loose and warned that inflationary pressures are becoming entrenched. Mann is one of the most hawkish members of the Bank of England's Monetary Policy Committee and has consistently argued for rate hikes to prevent the energy shock from spreading to the broader economy. She is also concerned that upcoming wage negotiations will exacerbate inflation driven by rising fuel and energy costs.

Another hawkish official, Megan Greene, said last week that faster-than-expected UK economic growth and a resilient job market show that the Bank of England's efforts to curb inflation are still insufficient. She reiterated recently that the current slowdown in UK wage inflation appears to have stalled at levels above those consistent with the 2% CPI target, bluntly stating that "the risk of second-round effects is bigger than we anticipated."

Latest data show that the number of UK payroll employees rose unexpectedly by 13,000 in September, a sharp contrast to the previously expected decline of 8,000 and the biggest monthly increase since August 2025. The figure for August was also significantly revised up, from an initial drop of 26,000 to an increase of 1,000. In the three months to August, the unemployment rate unexpectedly fell to 4.7%, the lowest since July 2025; the September unemployment rate remained at 4.4%.

The UK Office for National Statistics noted that although total pay, including bonuses, has fallen to its lowest level in nearly six years, regular wage growth has remained relatively stable—aligning with Greene’s assessment concerning wage stickiness.

Investec analyst Ellie Henderson pointed out that the Bank of England had previously believed a loose labor market would help reduce the risk of second-round effects from energy shocks, but the latest data showing an improved employment market "may make policymakers uneasy."

Bank of England chief economist Huw Pill also warned that upcoming wage agreements pose a threat. He pointed out that economic activity and the labor market are showing resilience in a supply-constrained economy.

However, in the view of Bank of England Deputy Governor Sarah Breeden, UK businesses are seeking to absorb energy shocks and cut costs themselves, rather than passing on higher costs to consumers. This suggests that she is cautious about the need for rate hikes. Yet she also emphasized that whether the impact of energy shocks is merely diminished or just delayed remains uncertain.

Aside from the hawkish signals sent by Bank of England officials, recent economic data have also boosted market expectations of rate hikes. Data released last Wednesday by the UK Office for National Statistics showed that the September Consumer Price Index (CPI) rose 3.5% year-on-year, higher than the 3.1% recorded in August and the market forecast of 3.4%; core CPI rose 2.8% year-on-year, surpassing both the August figure of 2.6% and the market expectation of 2.7%. In addition, the service sector inflation rate, a measure of domestic inflationary pressure, climbed to 3.7%.

Driven by the surging prices of gasoline and diesel, UK inflation unexpectedly jumped to its highest level in 11 months. The UK Office for National Statistics said that higher motor fuel costs pushed up inflation—as oil prices rose above $100 per barrel, diesel prices hit a record high at the end of September. Average UK households will also face further financial pressure as the price cap, which determines household energy bills, is set to rise in October. Furthermore, the Bank of England currently expects inflation to reach twice its 2% target by early next year and has raised its Q3 GDP growth forecast to 0.4%.