Bank of England signals UK rates may need to rise

The Bank of England may need to raise interest rates if growing inflation pressures strengthen further, Deputy Governor Dave Ramsden said on Monday^1,3. Ramsden cautioned that, although policy remains restrictive, inflation pressures are building, especially from energy⁴. Investing.com reported the same message, that the Bank could increase rates if pressures continue to build⁵. The Wall Street Journal wrote that Ramsden sees a case for raising the key rate if inflationary pressures build⁶.

Ramsden also addressed the Bank’s balance sheet, saying markets appeared to have absorbed its multi-year bond sale plans⁷. Reuters and Euronext carried his remarks as delivered in London on Monday^1,3.

Why it matters to investors

Britain has been the holdout. Unlike the European Central Bank and the US Federal Reserve, the Bank of England has not increased interest rates since the start of the Iran war⁹. A rate rise in November would see the Bank realigning with the Federal Reserve, the European Central Bank and the Bank of Japan, all of which have already moved⁶. That would leave Britain no longer alone among the major economies in resisting the tightening cycle^6,9. Global Banking and Finance reported Ramsden framing the pressure as coming especially from energy costs rather than from domestic demand⁴.

The market has been positioning for that realignment for weeks. The Telegraph noted that the Bank appeared to become more hawkish at its September meeting, looking more open to raising rates, and that UK borrowing costs rose ahead of the Chancellor’s conference speech¹⁰. ING said markets are pricing in more than four Bank of England hikes with oil trading around $100, and argued that expectations have turned too hawkish¹¹.

What to watch

The November meeting is the focal point, since that is where the Wall Street Journal placed the potential realignment with the other major central banks⁶. Between now and then, the energy channel Ramsden singled out is the variable to track, because it is what has pushed UK inflation pressure higher without a domestic demand story behind it⁴.

Gilt supply is the second question. Ramsden said he was happy with the market reaction to the multi-year bond sale plans⁷, but borrowing costs were already rising into the Chancellor’s speech¹⁰. If ING is right that pricing has overshot, the scope for a sharp reversal in short sterling is as large as the scope for further tightening¹¹.