The Bank of England (BoE) is expected to raise interest rates by 25 basis points to 4% on Thursday,
with economists at ING and Goldman Sachs forecasting a second hike in February.
Both firms anticipate a 7-2 vote split. James Smith, a developed markets economist at ING, noted that the two "doves" on the committee—Swati Dhingra and Alan Taylor—are "deeply skeptical about the need for rate hikes."
Goldman economists, led by James Moberly, pointed to rising energy prices, more resilient economic activity data, and recent signals from Governor Andrew Bailey and his deputies indicating a readiness to tighten policy.
According to Smith, the decision is driven more by risks than by current data. The Bank "is raising rates not because the economic data demands it, but because of the risks associated with a sharp rise in energy prices," he wrote.
The economist noted that there are currently few signs of second-round effects—private-sector wage growth stands at 3.4%—though inflation at 4% marks the threshold that the Bank of England has identified as increasing such risks. ING expects headline inflation to peak slightly above 4% early next year, fueled by an approximately 25% increase in the household energy price cap in January.
Goldman anticipates that the Bank of England’s new forecasts will show a higher short-term inflation peak—around 4.5% in the first half of 2027—as well as a more significant downward deviation in the medium term, resulting from a higher projected path for the base interest rate. The Bank believes that economic activity is proving more resilient than anticipated: GDP growth for the third quarter is estimated at 0.7%—three-tenths of a percentage point above the Bank of England’s own forecast—while the unemployment rate unexpectedly fell in August.
Looking further ahead, Smith noted that there is "virtually no precedent for a one-off rate hike," emphasizing that the Bank will likely seek to avoid signaling such a move. He expects the Bank’s messaging to remain vague, noting that a "hawkish surprise" would only occur if the Bank signals that "further tightening" is highly probable.
Goldman now anticipates a second rate hike—to 4.25%—in February, citing persistent pressure from energy prices, as well as stronger-than-expected data on economic activity and the labor market; however, they do not expect the Bank to provide clear signals to this effect.
Both firms believe that market expectations have gone too far. Smith pointed out that current market pricing accounts for more than four rate hikes over the coming year—a scenario that Bank of England Chief Economist Huw Pill has already suggested is unlikely.
Goldman economists have described market expectations for more than 100 basis points of policy tightening over the next year as "exaggerated," given the modest pace of wage growth and the anticipated slowdown in consumer spending during the winter months.
Smith also noted that the pound sterling is trading strongly on the back of these interest rate expectations: the EUR/GBP pair has fallen by nearly 4% over the past month, even as speculators continue to hold significant short positions against the pound.