The Bank of England is expected to raise its benchmark interest rate from 3.75% to 4% on Thursday, responding to inflationary pressure from higher energy costs. The move would be the first increase since August 2023, according to economists surveyed by Reuters.

The decision comes as inflation has exceeded the central bank’s expectations. Consumer prices rose 3.5% in the year to September, compared with the 3% rate forecast in the Bank of England’s July projections. In September, the bank warned that inflation could rise above 4% early next year.

Governor Andrew Bailey has said policymakers cannot wait for conclusive evidence that higher inflation is feeding into wages and prices, as doing so could leave them acting too late. The Monetary Policy Committee remains divided, however, after voting 6-3 to hold rates in September.

Analysts expect a 7-2 vote in favour of Thursday’s increase, with external members Alan Taylor and Swati Dhingra considered the most likely to continue opposing a hike. Both have pointed to spare capacity in the UK economy as a reason for delaying action, although recent growth data has been stronger than expected.

Despite criticism from more hawkish policymakers over the Bank of England’s response to inflation, the committee may avoid endorsing market expectations for three or four additional quarter-point increases in 2027. Those bets would take Bank Rate to between 4.75% and 5%.

Alexander Harvey, a UK economist at Oxford Economics, said the meeting’s minutes or Bailey’s comments could indicate that rates will not reach the level currently priced into financial markets. Statements from individual MPC members are expected to provide further clues, particularly from internal members whose positions have remained closely balanced.

Investors will also examine the bank’s first assessment of Finance Minister John Healey’s budget, announced the previous week. The measures included limited support for households and motorists facing higher energy costs, partly financed through a tax on banks. Economists said the measures would only marginally reduce the expected rise in inflation.

The Bank of England is due to announce its decision at 1200 GMT on Thursday. Bailey and some of his deputies are scheduled to hold a press conference at 1230 GMT.

Sources: Investing.com News.