Interest rates to rise just days after budget, economists warn

 The Bank of England will raise interest rates days after John Healey’s first Budget, economists have warned.

Analysts at several major banks expect the Monetary Policy Committee (MPC) will increase the Bank Rate to 4pc on Nov 5, as new escalations in the war in Iran send oil prices soaring.

This would mean borrowing costs rising to their highest level since last December, just a week after the Chancellor delivers his Budget on Oct 28.

James Moberly, an economist at Goldman Sachs, said that fresh jumps in energy prices mean UK inflation will surge to a peak of 3.9pc at the start of next year, up from the 2.9pc rate recorded in August and far above the Bank’s 2pc target.

Mr Moberly said in a note to clients: “That is around the threshold at which we think policymakers will become more concerned about risks of second-round effects.

“With the firmer growth data suggesting reduced downside risks to activity, we now think that the MPC will likely hike Bank Rate to 4pc in November.”

Holger Schmieding, the chief economist at German bank Berenberg, also forecast a 0.25 percentage point Bank of England rate rise in November.

Mr Schmieding wrote: “Strong growth over the summer suggests that the economy can largely weather a solitary hike.”

The UK economy grew at a higher pace than expected in July, with GDP climbing by 0.4pc compared with the 0pc analysts were anticipating.

The European Central Bank (ECB) raised its interest rate from 2.25pc to 2.5pc last week in a move that Christine Lagarde, its president, said was a “no-brainer” in response to inflationary pressures coming from the Middle East.

Expectations are mounting that the US Federal Reserve will follow suit at its next decision meeting on Wednesday, a move that would put Kevin Warsh, the new chairman, on a collision course with Donald Trump, who has called for lower borrowing costs.

Andrew Bailey, the Governor of the Bank of England, warned earlier this month: “The risks are, I’m afraid, on the upside here.”

Oil prices have soared by 20pc in the last month to $108 per barrel, the highest level since May, fuelling fresh inflation fears.

Analysts expect the Bank to hold interest rates at its meeting on Thursday because policymakers will be wary of triggering a downturn in the jobs market.

Unemployment is currently at 4.9pc, up from 4.7pc a year ago.

This is one reason why, after November, Goldman Sachs expects the Bank will keep rates on hold at 4pc for most of the year, before cutting at the end of 2027.

Traders, however, are pricing in four interest rate increases by the middle of next year, which would take the Bank Rate to 4.75pc.