Why Bank of England Hawks Are Gaining Ground as Inflation Heads Above 4%

A Bloomberg Economics model shows Bank of England (BoE) officials are the most hawkish since early 2023. Markets now price a near-certain rate hike on Nov. 5.

The BoE has not tightened as the Federal Reserve (Fed) and European Central Bank (ECB) did. It held in September on a 6-3 vote, so two members switching would flip the result.

Why Are Bank of England Officials Changing Their Tone?

Bloomberg Economics built BOESPEAK, a natural language processing model that scores the tone of Monetary Policy Committee (MPC) members. Scores above zero signal hawkish sentiment, meaning a preference for higher interest rates.

The index jumped after public appearances by MPC members, including at International Monetary Fund meetings in Bangkok.

Dan Hanson, chief UK economist at Bloomberg Economics, ties the shift to energy costs.

“The rise in the index is striking and has coincided with the ramp up in energy costs in recent months”

Dan Hanson, Bloomberg

Hanson expects hikes in November and February. However, he concedes the committee could simply be talking tough.

Governor Andrew Bailey holds a swing vote. He says prolonged high energy prices make a hike harder to avoid.

Deputies Dave Ramsden and Clare Lombardelli have echoed that warning as the Iran war continues.

How Far Behind the Fed and ECB Is the Bank of England?

The BoE kept rates at 3.75% in September, while the Fed raised its target range to 3.75% to 4%.

Bloomberg projects UK inflation above 4% by early next year, twice the BoE’s 2% target. Meanwhile, rising private-sector pay ahead of the 2027 wage talks may weaken the labor market’s ability to restrain prices.

However, the committee remains split. Deputy Governor Sarah Breeden said on Oct. 15 that 2022 taught firms to absorb costs instead of raising prices. Doves Alan Taylor and Swati Dhingra, who favor looser policy, urged caution.

A November hike would put the BoE on the same path as the Fed and ECB. Japan’s central bank has already moved, with its September rate hike lifting the rate to 1.25%, the highest since 1995. Investors expect at least four hikes by July, a path Chief Economist Huw Pill has questioned.

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