Bank of England may become a "laggard" in the global tightening wave? Holding steady tonight is the consensus, but energy inflation has pushed November rate-hike bets to 80%.

The Bank of England will announce its latest interest rate decision on Thursday at 19:00 Beijing time. The market widely expects the Bank of England to keep the bank rate unchanged at 3.75%, but the energy price shock triggered by the Iran war is fueling intense debate among policymakers and investors over "whether to raise rates." Investors are particularly focused on whether the Bank of England will signal anything suggesting that soaring energy prices could force it to follow the Federal Reserve in raising rates. The Federal Reserve announced a 25 basis point rate hike on Wednesday, its first since 2023, and hinted at further increases ahead. The Fed cited stubborn inflationary pressures, partly driven by energy costs linked to the Iran war. The European Central Bank also announced its second rate hike this year last week, after carrying out its first increase in three years in June. The Bank of Japan is expected to raise its key interest rate on Friday when it concludes its two-day meeting. If the Bank of England holds steady on Thursday, it will stand in clear contrast to other major central banks. A survey last week showed that most economists expect the Bank of England to keep the bank rate at 3.75% for the rest of this year. Among the nine Monetary Policy Committee (MPC) members, only three are expected to vote for a rate hike this week. Pricing in financial markets on Wednesday showed that investors see about an 80% probability of a 25 basis point rate hike by the Bank of England in November, which could be the first of about four rate increases over the next year. Economists, however, are far less certain than the market. About one-eighth of respondents in the survey expect the Bank of England to raise rates in November. So far this year, the Bank of England has not adjusted its key interest rate, with the last change in December last year, when it cut rates by 25 basis points. Inflation rises to 3.1%, energy prices press again Data released by the UK on Wednesday showed that inflation rose to 3.1% in August, breaking above 3% for the first time since March. The Office for National Statistics (ONS) said the jump was mainly driven by higher motor fuel costs, which surged 23% year-on-year. As a net energy importer, the UK is particularly vulnerable to external energy shocks and is still dealing with post-pandemic inflation and the cost-of-living crisis caused by the Russia-Ukraine war's impact on natural gas supply. UK natural gas and Brent crude oil futures have both risen nearly 20% this month, which is bad news for the UK, which relies heavily on imported energy. If the energy price rally continues, it will push the already 3.1% inflation rate further above the Bank of England's 2% target. Over the past five years, UK inflation has been above target for most of the time, with only three months as exceptions. JPMorgan economist Allan Monks said he expects the Bank of England to hold steady this week to avoid further stoking market expectations of a rapid tightening cycle, but the bank continues to expect the Bank of England to raise rates at its November meeting. In a note to clients, he said that given that energy price trends point to inflation peaking at 3.9% in February, "there is a clear case that the Bank of England should no longer delay raising rates." But others are not so sure. They emphasize that the labor market is cooling, and high market interest rates are already tightening financial conditions on behalf of the Bank of England. Analysts at investment banking advisory firm Evercore ISI said: "The gap between market pricing and policymakers' expectations is most obvious in the UK." They noted that the rates market expects about 4.5 rate hikes over the next year, but the Bank of England leadership still hopes to get through this period without raising rates. Bank of England Governor Bailey told reporters at the last rate meeting: "Please do not leave this room thinking that the Bank of England is heading toward a rate hike." US asset management company Franklin Templeton said on Wednesday that in this environment, UK government bonds look "particularly attractive" because a cooling labor market and a weakening economic outlook point to Bank of England policy being looser than market pricing. UK bonds and balance sheet reduction plan in focus UK government bond investors are also waiting for the Bank of England's annual update on Thursday regarding its latest plan to shrink its balance sheet by selling government bonds. On Tuesday, it was reported that the Bank of England will stop selling 20-year and 30-year UK bonds that have been hit hard by a global selloff. The move could provide some fiscal room for Chancellor John Healey, who is preparing to deliver his first budget statement on October 28. The report also noted that the Bank of England may go further and stop selling any UK government bonds to the secondary market, instead selling them to the government's Debt Management Office (DMO), which would then count the equivalent amount toward its own financing responsibilities. RBC strategist Peter Schaffrik wrote of this: "This would leave the DMO as the sole supplier of UK government bonds to the market, giving them complete control over debt issuance strategy." Global inflation concerns, political instability, and worries about UK fiscal policy have weighed on UK government bonds this year. The UK currently has the highest borrowing costs among the Group of Seven (G7), with yields on its 20-year and 30-year long-dated gilts approaching 6%. Deutsche Bank FX strategist Shreyas Gopal said in a report on Wednesday that the lack of any substantive hawkish surprise in this week's UK labor market and inflation data was "enough to push rate hike pricing for this meeting back down again." At present, the market is closely watching the Bank of England's policy statement on Thursday, the Monetary Policy Committee vote split, and the latest details of its balance sheet reduction plan. This information could determine whether market bets on a November rate hike continue to heat up or cool further.