But the Bank has been wrong before. It was consistently forced to push up inflation forecasts until the Government stepped in with a cap on energy bills, and with hindsight it was also too slow to raise rates towards the end of last year when it was unclear what the impact of the end of the furlough scheme would be.
Being wrong on interest rates will result in more pain for borrowers if rates stay higher for longer.
Policymakers have been burnt by markets in the past – just ask Liz Truss or Kwasi Kwarteng. The former prime minister and chancellor were forced to reverse large parts of their £45bn package of unfunded tax cuts after it led to a surge in borrowing costs that ultimately forced them out of office.
It’s been a wild ride for markets over the past month. And one that officials have tried their best to erase from the forecasts. At one point during the market chaos following the mini-Budget, investors were predicting that the Bank of England would need to increase rates to 6pc, a disaster for mortgage holders.
The Government moved its Autumn Statement to November, partly to avoid capturing the worst of this jump in borrowing costs that would have been reflected by the Office for Budget Responsibility, the Government’s official forecaster. The Bank also narrowed its usual 15 working day window to capture market pricing to just seven working days to October 25 to dodge the big spike in borrowing costs.
Markets currently expect rates to peak at just below 5pc, but Bailey and his rate-setters were unusually direct in pouring cold water over even these moderated expectations.
So, how high will rates need to go to get a grip on price rises? Economists at ING believe rates will rise to less than 4pc, noting that a “very divided” MPC is unlikely to push borrowing costs much higher.
James Smith, an economist at ING, said: “Central banks globally are having to assess whether ongoing aggressive rate hikes can be justified at a time when housing and corporate borrowing markets are beginning to creak.
“The choice the Bank faces at coming meetings is one of hiking aggressively to protect sterling, or moving more cautiously to allow mortgage rates to gradually fall. With around a third of UK mortgages fixed for just two years, we suspect the latter option will increasingly be seen as more palatable.”
Smith expects another raise of 0.5 points in December, and does not believe the Bank will go above 4pc in 2023.
However, markets and some forecasters believe Bailey will need to cave. The Governor could be putting his reputation on the line if he needs to go much higher than he has signalled, as other central banks, such as the US Federal Reserve, promise more aggressive action to tackle inflation.
