Could the Bank of England be the “lone left behind” in the global wave of austerity? There was an agreement not to put down the military tonight, but energy inflation has pushed the November interest rate hike bet to 80%

The Zhitong Finance App learned that the Bank of England will announce the latest interest rate decision at 19:00 Beijing time on Thursday. The market generally expects the Bank of England to keep bank interest rates unchanged at 3.75%, but the impact on energy prices caused by the Iran war is causing policy makers and investors to have heated discussions about “whether to raise interest rates.” Investors are particularly concerned whether the Bank of England will release any hints that soaring energy prices may force it to follow the pace of the Federal Reserve's interest rate hike.

The Federal Reserve announced a 25 basis point rate hike on Wednesday. This is the first time it has raised interest rates since 2023, and hinted that it will raise interest rates further in the future. The reasons given by the Federal Reserve include stubborn inflationary pressure, which is partly due to soaring energy costs associated with the war in Iran. The ECB also announced the second rate hike this year last week. Previously, it had raised interest rates for the first time in three years in June. The Bank of Japan is expected to raise key interest rates at the end of the two-day meeting on Friday. If the Bank of England remains on hold on Thursday, it will clearly differentiate itself from other major central banks.

According to a survey last week, most economists expect the Bank of England to keep bank interest rates at 3.75% for the rest of the year. Of the nine members of the Monetary Policy Committee (MPC), only three are expected to vote for interest rate hikes this week. Financial market pricing on Wednesday showed that investors think the probability that the Bank of England will raise interest rates by 25 basis points in November is about 80%. This may be the first time in about four interest rate hikes in the next year. Economists, however, are far less convinced than the market. About one-eighth of respondents to the survey expect the Bank of England to raise interest rates in November.

Since this year, the Bank of England has not adjusted the key interest rate. The last change was in December of last year, when it cut interest rates by 25 basis points.

Inflation rises to 3.1%, putting renewed pressure on energy prices

According to data released by the UK on Wednesday, the inflation rate rose to 3.1% in August. This is the first time since March that it has risen above 3%. The UK Office for National Statistics (ONS) said that this jump was mainly driven by rising fuel costs for motor vehicles, with related costs surging 23% year over year. As a net energy importer, the UK is particularly vulnerable to external energy shocks, and is still dealing with post-pandemic inflation and the cost of living crisis caused by the Russian-Ukrainian war on gas supply.

Both British gas and Brent crude oil futures have risen nearly 20% this month, which is bad news for the UK, which is heavily dependent on imported energy. If energy prices continue to rise, it will push the already 3.1% inflation rate even higher than the Bank of England's 2% target. Over the past five years, UK inflation has been above target for most of the past five years, with the exception of three months.

J.P. Morgan economist Allan Monks said that the Bank of England is expected to stay on hold this week to avoid further increasing market expectations of a rapid contraction cycle, but the bank continues to expect the Bank of England to raise interest rates at the November meeting. In his report to clients, he said that since energy price trends point to inflation peaking at 3.9% in February, “there are clear reasons to believe that the Bank of England should no longer delay interest rate hikes.”

But others aren't so sure. They stressed that the labor market is cooling down, and high market interest rates are already tightening financial conditions for the Bank of England. Analysts at investment banking consulting firm Evercore ISI said: “The gap between market pricing and policymakers' expectations is most obvious in the UK.” They pointed out that the interest rate market is expected to raise interest rates about 4.5 times in the next year, but the Bank of England leadership still hopes to get through this period without raising interest rates.

Bank of England Governor Bailey told reporters at the last interest rate meeting: “Please don't leave this room thinking that the Bank of England is on the way to raise interest rates.”

US asset management firm Franklin Templeton pointed out on Wednesday that in this environment, UK treasury bonds look “particularly attractive” because of the cooling labor market and weakening economic prospects, which indicates that the Bank of England's policy will be more relaxed than market pricing.

British bonds and downsizing plans attract attention

Treasury investors are still awaiting the Bank of England's annual update on Thursday regarding the latest plans to reduce balance sheets by selling government bonds. There were reports on Tuesday that the Bank of England will stop selling 20-year and 30-year British bonds, which have been hit hard by the global sell-off. The move may provide some room for fiscal maneuver for Chancellor of the Exchequer John Healy, who is preparing to issue his first budget statement on October 28.

The report also pointed out that the Bank of England may further stop selling any British treasury bonds to the secondary market and instead sell them to the Government Debt Management Office (DMO), which will then include the same amount of funds in its financing responsibilities.

Peter Schaffrik, a strategist at the Royal Bank of Canada (RBC), wrote in this regard: “This will cause DMO to become the sole supplier of British treasury bonds to the market, thereby giving them complete control over the bond issuance strategy.”

Concerns about global inflation, political instability, and concerns about the UK's fiscal policy have been putting pressure on British treasury bonds this year. The UK currently has the highest borrowing costs in the Group of Seven (G7), and the yield on its 20-year and 30-year long-term Phnom Penh bonds is close to 6%.

Deutsche Bank foreign exchange strategist Shreyas Gopal pointed out in a report on Wednesday that this week's UK labor market and inflation data lacked any substantial hawkish surprises, “enough for the interest rate hike pricing to fall again at this meeting.” Currently, the market is closely watching the Bank of England's resolution statement on Thursday, differences in the Monetary Policy Committee vote, and the latest details of its balance sheet reduction plan. This information may determine whether the market's bets on the November rate hike will continue to heat up or cool down further.