Bank of England Turns Towards a Rate Rise: 'Sparks in the Tinderbox'
Two deputy governors who voted to hold rates at 3.75% last week signalled they are now considering a rise. Sarah Breeden put it in one image: “The more sparks we’re throwing in the tinderbox, the more likely we might have to turn the hose on it.” Markets now price a 75% chance of a quarter-point increase in November and a second by February. The Bank expects inflation to top 4% early next year, more than double its target.
This is the war arriving in the mortgage market. Clare Lombardelli, speaking in Warsaw, set out the mechanism: “The longer higher energy prices persist, the greater the risk that indirect effects build and that inflation expectations, wage bargaining and price-setting behaviour begin to adjust in response.” In other words, a shock that began at the Strait of Hormuz stops being a one-off once people start bargaining around it. Not everyone agrees on the timing — Swati Dhingra argued the winter will be decisive, that this is not the broad-based surge of 2022 and that the jobs market is weaker than the headline suggests. The Governor's own warning last week was that “the longer this goes on, the more difficult this becomes”. Watch the November meeting, and what a rate rise does to a Chancellor already borrowing more than forecast.