Bank of England set to raise rates to 4%

Britain’s annual inflation rate accelerated to 3.5% in September, faster than expected, as fuel prices jumped. Economists now see inflation moving close to 4% early next year as millions of households face higher energy bills, even after government support in last week’s budget softened the blow.

For investors, the immediate focus is whether the BoE signals that Thursday’s move is the start of a broader tightening cycle or a one-off response to imported inflation. Higher rates typically support sterling and punish rate-sensitive sectors such as housing and consumer discretionary shares, while banks can benefit from wider net interest margins if loan demand holds up.

The pound has already firmed against the euro as traders price in a more hawkish BoE relative to the ECB, while UK equity exposure has been more measured. The iShares MSCI United Kingdom ETF, EWU, has eased from a recent high, even as the broader market remains sensitive to rate expectations.

The central bank will also publish updated growth and inflation forecasts, which are likely to show stronger near-term price pressure but a softer outlook later if energy costs keep draining consumer spending. The key risk for markets is that inflation remains sticky enough to force more than one hike, even as households and businesses absorb another hit to real incomes.