BoE Raises Rates by 25BP to 4%, Market Prices ~25% Probability of Another Hike in December
nashnova research
The Bank of England on Thursday raised its benchmark rate by 25 basis points to 4% — its first hike since August 2023 — to counter energy-driven inflation from the Iran war; traders price only a ~25% chance of a further move in December, broadly matching the BoE's own dovish signal of just one more hike ahead.
What is this hike responding to?
Oil and natural-gas prices have stayed elevated since the Iran war broke out in late February, keeping UK inflation stubbornly high.
The BoE lifted its benchmark rate by 25 bp to 4%, making it the last major central bank to restart tightening since the US–Israel campaign against Iran began roughly eight months ago.
This means → the BoE held out the longest before acting, signalling deep reluctance; energy inflation ultimately forced its hand.
Did markets see this coming?
LSEG data showed markets had priced the hike at over 99% probability before the decision — the move landed exactly as expected.
Traders simultaneously priced a further December hike at roughly 25% — a one-in-four chance of another move this year.
In plain terms = the hike itself was no surprise; the real signal is in "what comes next."
What is the BoE's own view of the path ahead?
Alongside the hike the BoE struck a dovish tone: borrowing costs are unlikely to reach the levels investors had previously expected.
The Wall Street Journal reported that investors had priced rates reaching 5% by late next year, while BoE officials now expect only one more hike, taking the terminal rate to 4.25%.
This means → a clear gap has opened between the central bank and the market — the BoE thinks 4.25% is enough; the market had been betting on 5%. That gap will narrow over the coming months, and the direction depends on inflation data.
What is the "second-round effects" risk?
BoE officials flagged rising concern over inflation second-round effects — the spiral where higher prices push workers to demand higher wages, which then pushes companies to raise prices again.
The core worry: a sharp jump in household heating costs in early 2027 could trigger a wage-demand spike.
This week's US midterm results gave Democrats control of both chambers; markets grew more hopeful about a Middle East resolution, and energy prices eased somewhat.
This reflects a wider reality: UK inflation does not depend on the BoE alone — every shift in geopolitics rewrites energy prices, and with them the rate path.
Can the economy withstand more tightening?
The S&P Global UK Construction PMI — a gauge where readings above 50 signal expansion and below 50 signal contraction — fell from 46.1 in September to 43.6 in October, the steepest drop since June.
Residential construction posted its largest decline of the year, a sign that rate-sensitive sectors are already feeling the pressure.
In plain terms = the BoE is tightening into an economy that is already cooling — the ~25% December hike pricing is the market's nearest test of whether the central bank dares to keep going.
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