The Bank of England is widely expected to raise interest rates for the first time in more than three years, according to economists. Financial market traders predict that rates will increase to 4% from 3.75% when the Monetary Policy Committee (MPC) announces its next decision on Thursday.
This would mark the first increase in borrowing costs since August 2023, potentially squeezing mortgage holders. Pressure on the MPC has grown after official figures showed the Consumer Prices Index (CPI) inflation rate rose to 3.5% in September, the highest level in 11 months.
Energy Prices Drive Inflation
The conflict in the Middle East has helped push CPI further away from the Bank's 2% target, with a surge in petrol and diesel prices being a major driving force. Inflation is expected to rise further this winter after Ofgem's energy price cap increased by 3.6% for a typical household on October 1 and is forecast to jump by another 22% in January.
Ellie Henderson, an analyst for Investec, said: "We imagine that many committee members' patience with the recent rise in inflation has worn thin." She added that "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." Henderson cautioned that producers might "not be willing or able to shoulder the burden of higher energy prices for much longer," which could push up prices in shops.
Economists See Rate Hike as Done Deal
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. "So far, 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," he said. "These factors will continue to dominate the outlook for Bank rate."
Harvey noted that the key thing economists will be watching for is any signal from the Bank about where interest rates could go next, with financial markets expecting further hikes into 2027. Other central banks have already raised rates, including the US Federal Reserve, which did so last month for the first time in three years.
Economic Indicators Support Action
The MPC will also consider other economic indicators, including the UK's unemployment rate, which fell to 4.7% in the three months to August, the lowest level in more than a year. Additionally, the economy unexpectedly grew by 0.1% in August, suggesting resilience despite pressure on consumer spending and wider volatility related to the Iran war.
