The Bank of England is expected to hike interest rates next week as policymakers battle to stamp on inflationary pressures building in the UK economy. 

City analysts have predicted that the Bank’s Monetary Policy Committee will vote to raise interest rates from 3.75 per cent to four per cent.

The Bank has been closely monitoring evidence for “second round effects”, where higher inflation could force workers to demand larger pay packets, with extra costs on firms thereby pushing inflation higher in a spiralling effect. 

Deutsche Bank is among a number of financial firms which has said the MPC will be split 6-3 in favour of tightening monetary policy due to growing concerns of these economic forces over the upcoming months.

Sanjay Raja, its chief UK economist, said governor Andrew Bailey would back a hike in interest rates as rising energy prices and stronger growth could prompt rate-setters to take “pre-emptive” action to prevent a higher spike in inflation over the next year. 

He said he expected “the MPC to emphasise that rate hikes are effectively an insurance policy on potential second-round effects”. 

Interest rate hike could be followed by another next year

The Bank is weighing up key data points showing stable private sector wage growth, high levels of spending, a declining number of job vacancies and inflation beating expectations as a result of elevated oil and gas prices feeding through into household bills. 

The Office for National Statistics said inflation in the year to September was 3.5 per cent, higher than the two per cent target set by the Bank. Threadneedle Street only briefly managed to get inflation to remain around two per cent in the middle of 2024. 

While larger settlements for public sector workers has kept wage growth well above three per cent, a rise in private sector wages, which are more closely watched by policymakers, has not yet shown clear signs of strengthening.

However, City economists have noted that a sustained rise in energy prices, which could take inflation far beyond four per cent, and growing momentum in the UK economy combined with a slight fall in unemployment could push the MPC to take immediate action to increase borrowing costs.

The Office for Budget Responsibility revised up its inflation forecasts for next year as price growth could average at about 3.4 per cent this week, sending a warning to John Healey and Andy Burnham on their mission to ease the cost of living.

Pantheon Macroeconomic analysts said a hike in interest rates was “nailed on”, predicting that just one member, Alan Taylor, would vote for no change to be made. 

Economists Rob Wood and Elliott Jordan-Doak said updated forecasts could be “consistent with” two interest rate hikes. 

“We expect the MPC to state that the size and duration of the energy shock are now large enough to require hikes in advance of evidence of second-round effects; in other words, justification for an insurance hike,” they said in a note to City traders.