Barclays now expects the Bank of England to raise interest rates by 25 basis points in November and again in February 2027, after the central bank kept Bank Rate at 3.75% in September and warned of increased inflation risks from the Middle East conflict and higher energy prices.
The forecast, from Barclays economists, reverses the bank’s previous call. They cited three developments in the Monetary Policy Committee’s September minutes: the MPC expects inflation to exceed 4% in the first quarter of 2027 based on recent energy price moves and a worsening geopolitical outlook.
It also sees a greater risk of second-round inflation effects, while several members said tighter policy would be appropriate if the Middle East conflict is not resolved in the coming weeks.
The MPC voted 6-3 to keep rates unchanged, with Greene, Mann and Pill backing an immediate hike.
External members Swati Dhingra and Alan Taylor took a different view from the rest of the majority, placing less weight on second-round inflation risks and more on economic slack.
The MPC said the risk of significant second-round effects had increased since July and could rise further if energy prices remained elevated.
Governor Andrew Bailey said prolonged conflict in the Middle East could require tighter policy, while Deputy Governor Sarah Breeden said a rate response would become increasingly appropriate if second-round risks materialise.
Barclays cited three factors that could delay a November hike: limited data before the meeting, including one inflation reading, one labour-market release and one monthly GDP report; the timing of the meeting one week after the Autumn Budget; and a lack of clear evidence so far of second-round inflation effects. The MPC will also not have results from its Annual Agents’ Pay Survey, which begins in early December.
Barclays expects the next hike after November to come in February rather than December, citing weak labour-market conditions and economic slack.
It sees the terminal rate at 4.25% under that scenario. A resolution of the Middle East conflict that reduces inflation risks is the main threat to the second hike, the bank said.
The MPC also said it would reduce holdings under its Asset Purchase Facility by £20 billion this year, taking the total planned unwind to £50 billion, in line with Barclays’ expectations.
Source: Investing.com