Inflation shock combined with economic resilience! Bank of England sends its strongest hawkish signal in over three years, with a November rate hike all but certain.

The BOESPEAK natural language processing model, which tracks the remarks of Bank of England Monetary Policy Committee (MPC) members, shows that the central bank's officials are sending the most hawkish signal in more than three years, paving the way for a rate hike as early as next month. BOESPEAK model shows shift in BoE MPC stance It is understood that the BOESPEAK index rose to its highest level since early 2023 following a series of recent speeches by Bank of England officials during the International Monetary Fund (IMF) and World Bank meetings. The index has risen sharply since the end of August. Although it has slightly retreated from its peak, it remains near its highest level since March 2023, when UK inflation stood at 10% and interest rates were at 4% and still rising. In response, economist Dan Hanson said: "The rise in the index is very striking, and it coincides exactly with the climb in energy costs in recent months." He expects the Bank of England to raise rates in November and February next year. He added: "Of course, it is also possible that the MPC is merely sending a hawkish signal. But we believe the balance of risks around the economic growth and inflation outlook has shifted enough to convince a majority of the committee that higher rates are needed." Unlike the Federal Reserve and the European Central Bank, the Bank of England has not yet tightened monetary policy in response to the worsening inflation shock caused by the conflict in the Middle East. But a growing number of Bank of England officials are warning of potential second-round inflation effects, whereby companies pass on higher costs to consumers while employees demand higher wages. Investors currently expect the Bank of England to raise rates next month with a probability close to 100%, and expect at least three more hikes by July next year. A recent survey showed that economists generally expect the Bank of England to raise rates in November and February next year. The market currently expects the Bank of England MPC to support a 25 basis point rate hike to 4% on November 5, which would be the first in a series of hikes before next summer. In September, the committee voted 6-3 to keep rates unchanged, so only two members would need to change their stance to reverse the vote outcome. Bank of England Governor Andrew Bailey is the key swing vote on the MPC. Although Bailey said no obvious second-round inflation effects have yet been seen, he warned that as the energy shock and the Middle East conflict drag on, avoiding a rate hike is becoming increasingly difficult. His two deputies, Dave Ramsden and Clare Lombardelli, have used similar language, while the Middle East war shows no sign of ending. Earlier this month, Catherine Mann said the UK labor market is "static" rather than loose, while warning that inflationary pressures are becoming entrenched. Mann is one of the most hawkish officials on the Bank of England's Monetary Policy Committee, and she has consistently argued that rate hikes are needed to stop the energy shock from spreading to the broader economy. She is also concerned that upcoming wage negotiations will exacerbate inflation driven higher by rising fuel and energy costs. Another hawkish official, Megan Greene, said last week that the UK economy is growing faster than expected and the job market remains resilient, which is enough to show that the Bank of England's efforts to curb inflation are still insufficient. She said again recently that the current disinflation process in UK wage growth appears to have stalled above a level consistent with the 2% CPI target, and said bluntly that "the risk of second-round effects is greater than we thought." The latest data show that the number of UK employees on payrolls unexpectedly increased by 13,000 in September, in sharp contrast to market expectations of a decline of 8,000, marking the largest single-month increase since August 2025. The August figure was also substantially revised upward, from an initial reported decline of 26,000 to an increase of 1,000. In the three months to August, the unemployment rate unexpectedly fell to 4.7%, the lowest level since July 2025; the September unemployment rate held at 4.4%. The UK Office for National Statistics noted that although total pay including bonuses has fallen to its lowest level in nearly six years, regular wage growth remains relatively stable corroborating Greene's assessment of wage stickiness. Investec analyst Ellie Henderson pointed out that the Bank of England had previously believed that labor market loosening would help reduce the risk of second-round effects from the energy shock, but the latest data show that job market conditions have improved, "which may make policymakers uneasy." Bank of England Chief Economist Huw Pill also warned that upcoming wage agreements pose a threat. He said that in a supply-constrained economy, economic activity and the labor market are showing resilience. However, in the view of Bank of England Deputy Governor Sarah Breeden, UK companies are seeking to absorb the energy shock themselves and cut costs rather than raise prices for consumers. That statement suggests she is cautious about the need for rate hikes. But she also stressed that whether the impact of the energy shock has been weakened or merely delayed remains an open question. In addition to the hawkish signals from Bank of England officials, recently released economic data have also boosted market expectations for a rate hike. Data published by the UK Office for National Statistics last Wednesday showed that the consumer price index (CPI) rose 3.5% year on year in September, above August's 3.1% and market expectations of 3.4%; core CPI rose 2.8% year on year, above August's 2.6% and market expectations of 2.7%. In addition, services inflation, a gauge of domestic inflationary pressure in the UK, rose to 3.7%. Driven by surging gasoline and diesel prices, UK inflation unexpectedly rose to its highest level in 11 months. The Office for National Statistics said motor fuel costs pushed up inflation after diesel prices hit a record high at the end of September as oil prices rose above $100 a barrel. Ordinary UK households will also face further financial pressure, with the price cap that determines household energy bills set to rise in October. In addition, the Bank of England now expects inflation to reach twice its 2% target early next year, and has raised its third-quarter GDP growth forecast to 0.4%.