The Bank of England is expected to raise interest rates for the first time in more than three years, according to economists. Rate-setters are widely anticipated to tighten monetary policy in response to rising inflation in the UK economy. Financial market traders predict rates will rise to 4 percent from 3.75 percent when the Bank's Monetary Policy Committee (MPC) announces its next decision on Thursday.
This would mark the first increase in borrowing costs since August 2023, potentially putting pressure on mortgage holders.
Inflation pressures mount
Pressure on the MPC has grown since official figures showed the rate of Consumer Prices Index (CPI) inflation rose to 3.5 percent in September, the highest level in 11 months. The conflict in the Middle East has helped push CPI further away from the Bank's 2 percent target rate, with a surge in petrol and diesel prices a major driving force.
Inflation is expected to rise further this winter after Ofgem's energy price cap increased by 3.6 percent for a typical household on October 1, with a further 22 percent jump forecast for January.
Analysts see hike as likely
Ellie Henderson, an analyst for Investec, said: "We imagine that many committee members' patience with the recent rise in inflation has worn thin. The longer energy prices remain elevated, the greater the risk that a temporary price shock becomes more permanent; a 'risk management' hike could guard against this."
She cautioned that producers might "not be willing or able to shoulder the burden of higher energy prices for much longer" and that this could push up prices in shops.
Alexander Harvey, UK economist for Oxford Economics, said a November rate hike looks to be a "done deal" for the committee, which will be responding to higher oil and gas prices. He noted that "two factors have been central to the MPC's decision-making since the outbreak of the conflict in the Middle East: the scale and duration of the energy price shock, plus the extent of any second-round inflation effects from elevated energy prices." These factors, he said, "will continue to dominate the outlook for Bank rate."
Further hikes expected
Harvey said the key thing economists will be looking out for is any signal from the bank as to where interest rates could go from here, with financial markets expecting further hikes into 2027. Other central banks have already increased their interest rates, including the US Federal Reserve, which did so last month for the first time in three years.
The MPC will also consider other economic indicators, including the UK's unemployment rate, which fell to 4.7 percent in the three months to August, the lowest level in more than a year. Additionally, the economy unexpectedly grew by 0.1 percent in August, suggesting resilience despite pressure on consumer spending and wider volatility related to the Iran war.
