With the Bank of England widely expected to raise rates for the first time since August 2023, Tuesday's 1.14% drop in the FTSE 100 offered a window into how investors are positioning before Thursday's verdict.

Interest rate decisions rarely arrive without a build-up, and this week's is no exception. On Thursday 5 November 2026, the Bank of England's Monetary Policy Committee is widely expected to lift Bank Rate by 25 basis points, from 3.75% to 4%. If it does, it will be the first increase since August 2023, a milestone that helps explain why investors have been watching the meeting so closely. A move that is widely expected can still unsettle markets, because the accompanying message about what comes next often matters as much as the decision itself.

Two days before that announcement, on Tuesday 3 November, the FTSE 100 recorded what Reuters called its steepest one-day fall in a month. The index closed at 10,638.43, down 122.90 points or 1.14%, ending a run of four straight gains. While metals and company news contributed, the pattern of the session carried several hallmarks of a market growing uneasy about the path of interest rates.

Banks moved first

Lenders are usually among the most closely watched stocks around a rate decision, and Tuesday was no different. The FTSE 350 banks index fell 1.6% ahead of the Bank of England announcement. HSBC (LSE:HSBA) slipped 2.0%, which made it the single largest approximate drag on the FTSE 100 in points terms, reflecting its heavy weighting in the index.

The relationship between banks and interest rates is not straightforward. Higher rates can widen the gap between what lenders earn on loans and what they pay on deposits, which can support profits. But rising borrowing costs can also squeeze households and businesses, raising concerns about Loan Demand and the ability of borrowers to keep up with repayments. When markets are uncertain about how far and how fast rates will rise, that tension can make bank shares more volatile, and selling ahead of the event can simply reflect investors trimming exposure while the outlook is unclear.

A market pricing more than economists expect

Perhaps the most striking feature of the backdrop is the gap between market expectations and some economists' views. According to LSEG data cited by Reuters, money markets had fully priced four quarter-point hikes by next September. That implies a substantial tightening cycle, not merely a single adjustment.

Not everyone is convinced. Alessia Berardi, head of global Macroeconomics at Amundi Investment Institute, acknowledged that the market was pricing a full hiking cycle but said: "we think that one or two moves will be enough." ING, meanwhile, expects a follow-up increase in February but described pricing for further hikes as looking "extreme."

That divergence matters for equities. If the Bank of England's messaging on Thursday suggests a shorter cycle than markets are assuming, rate expectations could ease. If it signals readiness to go further, the opposite could happen. Faced with that two-sided uncertainty, some investors appear to have preferred to reduce risk before the announcement rather than after it.

Energy is the common thread

The reason a hike is on the table at all links back to energy. Reuters noted that elevated oil prices have fuelled Inflation fears and that many central banks have already raised interest rates. Oil has been extremely volatile: Brent settled on Monday 2 November at $104.77, down $8.66 or 7.63%, before crude slid around 2% more on Tuesday in choppy trade as investors weighed talks aimed at ending the wars in Ukraine and Iran.

Early on Tuesday, Brent had briefly climbed to about $105.25 after The Wall Street Journal, citing US officials, reported a US strike on Iran's Qeshm Island. Officials described the strikes as defensive, aimed at preventing Iranian attacks on commercial shipping in the Strait of Hormuz, through which roughly one-fifth of the world's Crude Oil and Natural Gas shipments passed before the conflict began in late February 2026.

For a central bank, swings of that magnitude complicate the inflation outlook. Energy costs feed into transport, Manufacturing and household bills, and policymakers may worry that persistent price pressures become embedded in wages and expectations. That is why the energy story and the rate story are so closely intertwined this week.

Currency markets were relatively calm. Sterling traded around $1.3417 on Monday 2 November and about 83.53p per euro, according to Reuters. A rate rise that is already widely anticipated may have limited immediate impact on the pound, although any surprise in tone could change that.

Beyond banks, the FTSE 100's decline was broad. The FTSE 350 basic resources index fell 2.6% as copper hit a multiweek low, while Associated British Foods (LSE:ABF) was among the fallers after forecasting lower annual profit. The mid-cap FTSE 250, which is often seen as more sensitive to the domestic economy, fell a more modest 0.5% to 24,674.91. That smaller decline suggests Tuesday's selling was concentrated in large, globally exposed stocks as much as in rate-sensitive domestic names, so rate nerves were one important Factor among several rather than the only one.

Key dates to watch

Wednesday 4 November:Eurozone inflation figures (expected 3.9%), plus a Barratt Redrow trading statement and Marks & Spencer half-year results.

Thursday 5 November:Bank of England MPC decision, with a 25bp rise to 4% widely expected.

Friday 6 November:US October jobs report.

Thursday 12 November:ONS first quarterly GDP estimate for July to September 2026, published at 7:00am.

The bottom line

Tuesday's fall was not purely about interest rates, but the Bank of England's looming decision clearly shaped the mood. Banks slipped ahead of the announcement, markets are pricing a more aggressive tightening path than some economists expect, and oil-driven inflation worries remain unresolved. What policymakers say on Thursday about the likely length of any hiking cycle may prove as important to the FTSE 100 as the decision itself, and the week's later data, from US jobs to UK growth figures, will add further pieces to the picture.