Johan Du Plessis
Portfolio Manager, Liquidity Strategies
Published:
In brief
- The Bank Rate increase by the Bank of England (BoE) was expected, but the vote was more hawkish than anticipated. The Monetary Policy Committee (MPC) raised the Bank Rate by 25 basis points (bps) to 4.00%. Eight members supported the 25 bps hike, while Catherine Mann, an external member of the MPC, preferred a larger, 50-basis-point increase. The surprise was not the size of the increase, but the breadth of support for action.
- Energy is pushing inflation higher, whether it spreads is the decisive question. BoE staff project inflation of around 4.5% in the first quarter of 2027 and 5% in the second. The MPC is looking for evidence that firms are passing costs into other prices and that workers are seeking higher pay to compensate.
- Further tightening is possible, but the MPC has not committed to it. Governor Bailey sees an argument for another increase unless inflation risks ease, and several colleagues have expressed concern that one move may not be enough. The Committee’s guidance is deliberately conditional: policy is “not on a pre-set path.”
The decision was straightforward, the vote was not
For the first time in more than three years, the MPC increased the Bank Rate, from 3.75% to 4.00%. The hike was highly anticipated however the voting split created a hawkish bias to the decision. Eight members backed the 25 bps increase whilst Mann preferred a more meaningful move of 50 bps.
Leading up to the meeting the majority of market participants expected a more dovish split vote. The unanimous preference for tighter policy signals how seriously the Committee views the inflation risk from sustained high energy prices. The majority concluded that the scale and duration of the shock had put enough pressure into the inflation pipeline to warrant acting now, despite acknowledging that there is, as yet, limited evidence of knock-on effects in wages or prices beyond energy.
The agreement on immediate action should not be mistaken for agreement on what follows. Mann’s case for a 50bps increase rested on risk management and credibility: she judged that high inflation could provoke stronger responses in wage and price setting, potentially making inflation more persistent. The other eight members chose a smaller step. That leaves the MPC able to respond flexibly if those risks materialise without assuming, before the evidence is in, that a prolonged hiking cycle is necessary. It also confirms that monetary policy is not on a pre-set path. Bailey reinforced that distinction: November should not be seen as the first move in an inevitable long sequence, but neither should it necessarily be treated as the last increase.
Energy has changed the inflation outlook, but not yet the underlying story
The direct effect of higher energy costs is already visible. Consumer Price Inflation (CPI) inflation reached 3.5% in September, and energy accounted for roughly one percentage point of that figure. Bank staff expect the direct effects to build over the coming quarters before fading, with inflation projected at around 4.5% in Q1 2027 and 5% in Q2 2027. Recent declines in spot gas prices could improve the outlook if they persist, but a short-lived move in wholesale prices offers less reassurance than a sustained decline.
The more important uncertainty lies beyond the direct effect of energy. So far, there is limited evidence that higher costs are spreading widely into other consumer prices or wage settlements. That is the central tension for monetary policy: a prolonged energy shock could make domestic inflation more persistent, or it could slow activity enough to limit the pass-through. The Bank’s stronger near-term growth forecasts give the MPC some room to respond to the first risk. Recent resilience does not mean every part of the economy is equally strong, with Consumer-facing businesses remain exposed to the squeeze on household budgets
What comes next?
The MPC next steps will be determined by both the persistence of the energy shock and evidence of second round impacts. A renewed rise in wholesale energy prices would increase the pressure to act sooner. Clearer signs that pay settlements and services prices are responding to higher headline inflation would also strengthen the case for a more prolonged tightening cycle.
Given several member’s reference to further action in the absence of weaker inflation pressures, the December MPC meeting is considered to be “Live”. However, the divergent views on the MPC would favour waiting until February, when the MPC will have updated forecasts and more clarity. Beyond the next decision, additional tightening would require a stronger indication that an external energy shock is becoming embedded in domestic inflation.
Strategy implications
In our view, a further increase by February remains likely. Beyond that, we believe the outlook will depend chiefly on whether second-round effects emerge in wages and prices. Against market expectations for three additional hikes, we see value on the UK money market curve.
For cash investors, this argues for balancing the opportunity to lock in attractive yields with the flexibility to respond if rates rise further. Our sterling liquidity strategy retains a bias towards longer duration, while defensively positioned, targeting weekly liquid assets above 45% and a weighted average maturity (WAM) of 45–50 days.