The Bank of England is likely to raise rates on Thursday: why could sterling still fall?

Executive summary

The decision is all but settled; the question lies in the details. The Monetary Policy Committee (Monetary Policy Committee (MPC)), which sets interest rates at the Bank of England, the United Kingdom's central bank, announces its decision at midday on Thursday 5 November. Alongside it comes the Monetary Policy Report, the bank's quarterly economic forecast report. We expect Bank Rate, the bank's official interest rate, to rise by 25 basis points from 3.75% to 4%. A basis point is one hundredth of a percentage point. This would be the first increase since August 2023. That is the expectation of 54 of 63 economists in a Reuters poll and all thirty-five economists in a Bloomberg poll, while the prediction market on Polymarket indicates a 98.5% probability of an increase on the afternoon of 3 November. This is a market where participants trade contracts tied to future event outcomes, with prices reflecting their estimated probabilities.

What has changed since September? When the bank held rates on 17 September by 6 votes to 3, headline inflation, which measures changes in the prices of a basket of consumer goods and services, stood at 3.1%. September's reading, released on 21 October, then came in at 3.5%, while core inflation, which excludes food and energy, rose to 2.8%. Services inflation, which measures changes in service prices, rose to 3.7%, and unemployment fell to 4.7%. This weakened the argument used by most members backing a hold: that labour-market slack, meaning available labour beyond current demand, would prevent the energy shock from feeding through to wages and prices. An energy shock is a sharp change in energy prices or supply.

Where do the two additional votes come from? An increase requires five votes out of nine, and in September only three members backed it: Megan Greene, Catherine L Mann and Huw Pill. But the minutes, the written record of that meeting's discussions, show that four of the six who voted to hold explicitly made their position conditional: if the conflict persisted and the risk of second-round effects increased, tightening, meaning a rate rise here, would become more likely. Second-round effects mean individuals and businesses seeking to recoup lost real income by raising wages and prices. That condition has since been met. The two members furthest from backing an increase are Swati Dhingra and Alan Taylor. We therefore expect a 7 to 2 vote.

A rate rise does not necessarily mean a stronger pound. Across the fourteen rate-rise decisions in the previous cycle, from December 2021 to August 2023, sterling fell against the dollar on decision day 8 times, with an average move of −0.44%. In the Commitment of Traders report (Commitment of Traders (COT)), which shows positions by trader category and is published by the Commodity Futures Trading Commission (CFTC), the US regulator, asset managers, institutions managing client investments, hold what is known as a net short position in sterling. This means short contracts exceed long contracts; the difference reached 128,893 contracts as of 27 October. This is the ninth-largest net short position in 1,064 weeks since 2006, and all eight larger positions were recorded in 2026.

Our assessment: A 25 basis point rise to 4% by a 7 to 2 majority, with conditional forward guidance, meaning signals from the bank about the path of future decisions, without committing to a series of increases. Sterling and UK government bond (Gilts) yields will be driven by two factors; these bonds are borrowing instruments issued by the UK government, and their yields measure the income they generate for investors relative to their price. The two factors are the vote split and the inflation peak in the new report. The increase itself is already almost fully priced into markets.

Question 1 of 5 · The decision