Bank of England Rate Hike: Why February's Second Rise to 4.25% Is the Real Decision

At noon in London today, the Bank of England is widely expected to do something it has not done since August 2023: raise interest rates. A Reuters poll of 63 economists found 54 expecting a quarter-point rise in Bank Rate, from 3.75% to 4.00%, and overnight-index-swap pricing put the chance of a hike at effectively 100%. If that sounds like a done deal, it is. The interesting decision is not today's. It is the one the Bank will face in February, when it must decide whether a second rise, to 4.25%, is warranted — or whether today's move was a one-off response to an inflation spike that is already fading.

The case for acting today is straightforward. Inflation rose to 3.5% in the year to September 2026, up from 3.1% in August and well above the Bank's 2% target. That overshoot was driven in large part by energy prices caught up in the US-Iran war, and it arrived after a summer lull in that conflict had led the Bank to forecast something closer to 3%. At its September meeting, the Monetary Policy Committee voted 6–3 to hold; the three dissenters already wanted a rise. A 7–2 vote for a hike today is the consensus expectation, and Governor Andrew Bailey has hinted in that direction since September. Nobody on the committee wants to repeat the Bank's past error of dismissing an inflation shock too quickly.

What happens after today is where the consensus breaks apart, and that split is the story. Money markets are pricing three or four further quarter-point rises through 2027, taking Bank Rate to between 4.75% and 5.00%. The big forecasting houses are having none of it. Goldman Sachs, Rabobank, Deutsche Bank, Morgan Stanley and Oxford Economics all converge on the same, much flatter path: a rise today, one more in February to 4.25%, and then a long pause. Deutsche Bank's case is the most instructive — it argues that a chunk of what markets price is a risk premium for uncertainty, not a genuine expectation of four hikes, and that once that premium is stripped out, the priced path looks far less aggressive. The Bank's own chief economist, Huw Pill, has publicly doubted the need for four rises. Polymarket tells a similar story of doubt rather than certainty: its nearest February market for a Bank of England decision traded Yes at $0.59 on 5 November, a long way from the near-unanimity attached to today's move.

The February decision will turn on a question that today's vote cannot answer: is energy inflation leaking into everything else, or is it staying contained? If wages and service prices start chasing energy costs upward, the hawks will have their second hike and possibly more. If not — and the early signs, including a sharp fall in Brent crude this week to about $94 a barrel as markets priced in a possible easing of the US-Iran war after the US midterm elections, point that way — then February's hawks will be arguing against their own evidence. Goldman Sachs expects no move at the December meeting, which leaves February as the first real test of whether this is a cycle or a single step. The Bank will also have fresh forecasts by then, and a clearer read on whether the war premium in energy prices is durable or already unwinding.

My own judgement sides with the forecasters over the markets, but only just. The breadth of agreement among Goldman, Rabobank, Deutsche, Morgan Stanley and Oxford Economics is real evidence, and their mechanism — energy pushing up headline inflation without yet producing broad second-round effects — matches what the data show so far. But a 4.25% call for February is a bet that an active war's energy shock stays contained for three more months, and that is a fragile thing to bet on. A renewed escalation, a larger-than-expected rise in the national living wage, or a hot winter inflation print could easily force the Bank's hand further, or, just as plausibly, a ceasefire could make even the February rise look unnecessary. That is why the February meeting, not today's, is the decision worth watching: today's hike tells you the Bank is worried, but February will tell you whether it was right.