6 November 2026: The BoE votes 8-1 for a hike

The Bank of England’s decision to raise interest rates to 4% marks a significant turning point in UK monetary policy, delivering its first rate increase since 2023. The move reflects growing concern among policymakers that inflationary pressures remain persistent despite signs of softer economic activity. By tightening policy, the Bank aims to prevent inflation expectations from becoming entrenched and to reinforce its commitment to returning price growth to the 2% target.

Financial markets had largely priced in the move, but attention now shifts to the Bank’s guidance on future tightening. Higher borrowing costs are expected to put additional pressure on mortgage holders, businesses and consumer spending, potentially slowing economic growth in the months ahead. However, policymakers have judged that the risks posed by elevated inflation outweigh the short-term drag on activity.

For sterling, the decision is broadly supportive, particularly against currencies backed by more dovish Central Banks. Nevertheless, the pound’s longer-term direction will depend on whether inflation proves stubborn enough to require further rate rises or whether economic weakness limits the BoE’s room for manoeuvre. Markets will now closely monitor incoming inflation, wage and growth data for clues about the next policy step.

The Bank of England's voting split highlighted differing views on the inflation outlook, despite broad agreement that policy needed to tighten. While the Monetary Policy Committee voted 8-1 for a 25 basis point increase, taking Base Rate to 4%, external member Catherine Mann argued for a larger 50 basis point move.

Mann’s preference for a more aggressive hike reflects her longstanding concern that underlying inflation pressures, particularly in wages and services, could prove more persistent than expected. In her view, acting more forcefully now could help reduce the risk of inflation becoming entrenched and limit the need for further tightening later.

However, the overwhelming 8-1 majority for a quarter-point increase suggests most policymakers favour a relatively cautious approach. With borrowing costs already significantly higher than in recent years, concerns about economic growth and the impact on households and businesses appear to have carried greater weight.

The split sends a moderately hawkish signal to investors. While the MPC remains focused on bringing inflation back to target, the preference for a smaller move suggests policymakers are balancing inflation risks against a slowing economy, keeping future policy options open.

Andy Burnham said he could delay unveiling his 10-year plan for Britain. This revelation may fuel concerns within the Labour Party that he isn’t moving quickly enough to deliver the radical change he’s promised.

In an interview with The Economist, the Prime Minister said the document, long touted as coming next month, may slip into the new year, adding: “December or January, I think we will need to leave that open.”

After Chancellor of the Exchequer John Healey delivered a relatively low-key budget last week, consisting of 98 generally small measures, the task of delivering a generational transformation of the UK economy rests on the plan Burnham is drawing up.

But Labour MPs have already privately expressed doubts about how impactful the project will be, Bloomberg reported last week, and any delay will do little to allay their concerns.

Burnham told The Economist that reports about the document being thin are “underestimating the significance” of the plan, adding: “I will lay out my very clear vision for Britain.”

Downing Street is still hiring policy advisers to develop the strategy and has suggested the plan will start a national conversation, with detailed policy work to follow later.

“It will involve power, it will involve water, housing, and transport,” Environment Secretary Angela Eagle told Times Radio on Thursday. “All that work is being done, and you just have to wait a little bit longer to see what we’re going to publish.”

Sterling delivered a relatively resilient performance in global FX markets yesterday, supported by the Bank of England’s decision to raise Bank Rate to 4.0%, its first increase since 2023.

Against the US dollar, the pound briefly strengthened after the announcement before trading broadly unchanged around 1.35 as investors weighed the prospect of further tightening against signs of a slowing economy.

Sterling also edged higher against the Euro, with GBP/EUR benefiting from the Bank’s relatively hawkish message and indications that additional rate increases may still be required if inflation pressures persist.

Overall, the pound ended the session slightly firmer, supported by higher UK rate expectations. However, gains were limited as markets judged the Bank likely to proceed cautiously and avoid an aggressive tightening cycle.

The Bank’s Governor Andrew Bailey said he is “watching the extent of inflation pass-through,” while acknowledging that inflation risks are tilted to the upside. He added that future decisions hinge on how quickly inflation edges lower towards the BoE’s 2% inflation target. He said that a resolution of the US-Iran conflict “would bring limited relief from inflation.”

Federal Reserve Bank of Cleveland President Beth Hammack spoke broadly on several issues affecting the Federal Reserve in Zurich yesterday. She told reporters that interest rates need to remain restrictive to bring inflation to the Central Bank’s target, and that she prefers more frequent moves to reduce the risk of policy falling behind.

“I expect that monetary policy will need to move to a restrictive stance to bring inflation back to 2% promptly.”

“This strategy would also reduce the risk of policy falling behind where it needs to be and of an inflationary mindset taking hold,” she added.

Hammack was one of two Fed officials who dissented last week, voting for another hike when policymakers held their benchmark rate steady after strong inflation data. A handful of other officials speaking since the meeting have advocated a gradual pace of tightening to limit the effects on financial markets and the economy.

Investors see it as likely the Fed will raise interest rates in December and again in February or March, according to futures-contract pricing.

Speaking separately, Richmond Fed President Tom Barkin reiterated his support for a “gradual” pace of rate hikes. He declined to say how far rates will need to rise.

The Cleveland Fed chief also spoke about the dominance of the US dollar, which, she said, relies on the rule of law in the US, its availability in strong, liquid markets, and the Central Bank's independence.

Hammack separately addressed the growth of so-called stablecoins, digital tokens backed by a sovereign currency, typically US dollars.

“Stablecoins currently have limited use, they could expand rapidly if companies with large, existing customer networks, like Google or Amazon, issued their own tokens. Autonomous artificial intelligence systems could also ramp up stablecoin use”.

“If you start seeing more AI agents that need to buy and sell things, if they start using stablecoins or other digital assets, rather than running money through either credit cards or traditional payments, that could be a material shift,” she said. “We haven’t seen those use cases yet, but we’re certainly keeping a close eye on that.”

A Democratic clean sweep of Congress could have significant implications for the US economy and financial markets. With control of both chambers, policymakers would face fewer obstacles to advancing legislation on infrastructure, clean energy, healthcare and industrial policy. Supporters argue that this could boost long-term investment, productivity and employment.

However, markets will also focus on the fiscal implications. Greater Government spending could support near-term growth but may widen budget deficits and borrowing requirements. If growth strengthens and demand remains robust, inflation pressures could prove more persistent, potentially complicating the Federal Reserve’s policy outlook.

For investors, the immediate impact may be reduced political uncertainty, as the risk of legislative gridlock declines. Sectors linked to renewable energy, infrastructure and domestic manufacturing could benefit from increased Federal support. At the same time, expectations of higher government spending may keep bond yields elevated, influencing borrowing costs across the economy.

Overall, a Democratic clean sweep would likely be viewed as growth-supportive, but important questions remain about deficits, inflation and the future path of interest rates.

Investors are now assessing the likelihood of additional fiscal spending, infrastructure investment and industrial support measures. While these policies could boost growth, they may also raise concerns about larger budget deficits and higher government borrowing. Meanwhile, Trump faces the challenge of rebuilding political momentum ahead of the next presidential contest. For now, however, Democratic policymakers appear to have gained the upper hand, leaving markets to weigh the economic consequences of a more decisive and unified government.

As Democrats gain momentum and push legislation through Congress, President Trump’s political toolkit may increasingly centre on a single word: veto. Faced with a legislature more confident in advancing its priorities, the White House could find itself relying on executive powers to slow or block measures it opposes. While a veto remains a powerful constitutional weapon, it also signals a more defensive political position.

The US dollar endured a mixed session across global markets yesterday, extending losses as investors reacted to the Democratic sweep in the US midterm elections. The outcome boosted risk appetite, pushed Treasury yields lower and fuelled expectations that Washington could face greater constraints on future fiscal and foreign policy initiatives.

The dollar index fell towards one-month lows near 101.2, with the greenback losing ground against most major currencies. The Euro strengthened above 1.12, while the yen also advanced as investors rotated away from the dollar.

Falling oil prices added to the dollar’s difficulties by easing inflation concerns and reducing demand for traditional safe-haven assets. At the same time, markets viewed the political result as potentially limiting Trump’s policy ambitions, further weighing on the currency.

Despite the weaker performance, expectations for further Federal Reserve tightening remained largely intact following robust market activity. As a result, the dollar’s decline was moderate rather than disorderly, and traders are now turning to today’s payrolls report for direction.

Eurozone producer price inflation has risen to its highest level since February 2023, underscoring renewed inflationary pressures in the region's industrial sector. Rising input costs, particularly those linked to energy, commodities and supply chains, have pushed factory-gate prices higher, raising concerns that progress in bringing inflation under control may become more difficult in the months ahead.

Producer prices are closely watched because they often provide an early indication of future consumer inflation. If businesses continue to face higher costs, some of these pressures may eventually be passed on to households through higher retail prices. This poses a challenge for the ECB, which is working hard to steer inflation back towards its 2% target.

The latest increase also comes at an uncomfortable time for the Eurozone economy. Growth remains fragile, particularly in major economies, meaning policymakers must balance inflation risks against the threat of weaker activity. For financial markets, stronger producer price inflation is likely to reinforce expectations that the ECB will remain cautious about signalling any rapid shift towards easier monetary policy, even if economic growth continues to disappoint.

Comments from ECB hawks suggesting that further interest rate increases may be required underline the Central Bank’s ongoing concern about inflation risks. Despite a period of weaker economic growth across the Eurozone, policymakers remain wary that rising energy costs, robust wage growth and persistent price pressures could prevent inflation from returning sustainably to the ECB’s 2% target.

Recent economic data present a difficult balancing act. While activity indicators point to a sluggish economy, inflation measures, including this week’s producer price data, show signs of renewed strength. For hawkish members of the Governing Council, this raises the risk that inflation becomes more entrenched if policy is eased prematurely.

Markets are therefore being reminded that the ECB’s fight against inflation may not be over. Even if additional rate hikes are not the central scenario, policymakers appear reluctant to rule them out. Such rhetoric is intended to keep inflation expectations anchored and to maintain the ECB’s credibility.

For the Euro, expectations of further tightening could provide support, particularly if other G10 Central Banks appear closer to the end of their own policy cycles.

Christine Lagarde has acknowledged that the Eurozone faces a particularly difficult situation, as higher energy prices continue to challenge both inflation and economic growth. The surge in energy costs is pushing up prices across the economy while squeezing household incomes and business margins, complicating the European Central Bank's task.

For policymakers, the dilemma is clear. Inflationary pressures remain elevated and require a firm response, yet tighter monetary policy risks further straining an already fragile economy. This combination of slowing growth and rising prices leaves the ECB with little room for error as it seeks to maintain price stability without triggering a deeper downturn. These issues echo stagflation.

Lagarde’s comments underline the uncertainty surrounding the economic outlook. Much will depend on how much longer the energy shock lasts and how much higher costs feed into wages and broader inflation expectations. As a result, the ECB is likely to remain highly data-dependent, balancing concerns over persistent inflation against signs of weakening activity. For markets, the message is that policymakers remain cautious, vigilant and prepared to adjust policy as conditions evolve.

The uncertainty is being further inflamed by the uncertainty surrounding Lagarde’s replacement.

The Dutch Central Bank advanced the name of its former Governor Klaas Knot as the first ‘official’ name to be put ‘into the hat’. The Eurogroup has said that all names must be provided by the end of today, but, in typical ECB style, that deadline will likely be extended.

The Euro had a constructive session in global FX markets yesterday, driven primarily by broad-based US dollar weakness rather than any major shift in eurozone fundamentals. The single currency advanced against the greenback, with EUR/USD rising above 1.12 as investors reduced defensive dollar positions following the Democratic sweep in the US midterm elections.

However, gains were capped by ongoing concerns about the region’s economic outlook. Higher energy costs, weak industrial activity, and fragile consumer confidence continue to weigh on the bloc. Even so, lower US Treasury yields and a softer dollar environment helped the Euro outperform many of its peers.

Overall, the euro ended the day firmer, supported by dollar weakness and expectations that the ECB will remain cautious about signalling any early shift towards easier monetary policy.

Have a great day!