Pressure is building on the Bank of England (BoE) to hike UK interest rates sharply this week, as it faces the highest inflation rate in decades and a government keen to cut taxes to stimulate the economy.

The money markets are pricing in a 75 basis-point hike on Thursday (22 September), which would be the biggest rise in over 30 years and would lift the UK base rate from 1.75% to 2.5%. Traders are also anticipating large rate rises at the BoE’s meetings in November and December, taking the base rate to 3.75% by Christmas.

Investors say the weak pound could force the BoE to act aggressively. Katharine Neiss, chief European economist at PGIM Fixed Income, said: “With the UK economy weakening, there is a case to be made for the Bank of England to stay focussed on the medium-term outlook for inflation and on replenishing its toolkit. This would speak to continuing with its measured pace of tightening, alongside a well-telegraphed active run-off of its balance sheet.

“But with inflation continuing to rise and the prospect of a sizable fiscal expansion on the horizon, there are many that would argue for a more aggressive rate rise at the BoE’s next policy meeting.”