The Bank of England is expected to raise interest rates for the first time in more than three years, a move that could squeeze borrowers. Many economists believe rate-setters will tighten monetary policy to tackle rising inflation in the UK economy.
Traders in financial markets widely expect rates to increase to 4% from 3.75% when the Bank's Monetary Policy Committee (MPC) announces its next decision on Thursday, November 5. This would mark the first increase in borrowing costs since August 2023.
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% 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% 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% for a typical household on October 1 and is forecast to jump by a further 22% in January.
Economists weigh in
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, and 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.
Suren Thiru, chief economist for the Institute of Chartered Accountants England and Wales (ICAEW), said an "interest rate rise to 4% looks all but certain," agreeing that it would likely be viewed as a "precautionary hike to contain price pressures."
Economic backdrop
The economy unexpectedly grew by 0.1% in August, suggesting resilience despite pressure on consumer spending and wider volatility due to the Iran war. The MPC will also consider the UK's unemployment rate, which fell to 4.7% in the three months to August, the lowest level in more than a year.
