The Bank of England is expected to increase interest rates on Thursday as rising energy costs continue to push inflation higher. However, the central bank may also signal that further rate rises next year are not guaranteed, despite financial markets expecting several more increases.
Economists surveyed by Reuters predict that the Bank will raise the base rate from 3.75% to 4%. If confirmed, this would be its first increase since August 2023, when inflation was still more than three times the Bank’s 2% target.
The Bank is keen to avoid repeating its previous experience of underestimating how long inflation would remain high following an earlier surge in energy prices. With global energy costs still elevated and little indication that the conflict involving Iran will end soon, policymakers are concerned about the risk of inflation becoming more deeply rooted in the economy.
There is also a difference in timing compared with the previous energy price crisis. The Bank of England was among the first major central banks to increase rates last time, whereas the US Federal Reserve and European Central Bank have already acted ahead of it this time.
Bank faces growing pressure to act
Governor Andrew Bailey has warned that the Bank cannot wait for definite evidence that higher inflation is feeding into wages and prices before responding. Waiting too long could mean action comes after inflation has already become more difficult to control.
However, members of the Monetary Policy Committee (MPC) remain divided over how much evidence is needed before rates should rise. In September, six members voted to keep rates unchanged, while three supported an increase.
Bailey said last month that businesses appeared to be absorbing higher costs more effectively than they did in 2022. Nevertheless, inflation has continued to exceed the Bank’s expectations.
In September, the Bank warned that inflation could rise above 4% early next year. It also noted that the latest increase in energy prices shared similarities with a more severe scenario outlined in its previous forecasts, where inflation could become entrenched.
Consumer prices rose by 3.5% in the year to September, compared with the Bank’s earlier forecast of 3%. Stefan Koopman, senior macro strategist at Rabobank, said the pressure to increase rates was becoming harder for the Bank to avoid.
He suggested that even policymakers who would prefer to leave rates unchanged may now need to respond to at least some of the increases already anticipated by financial markets.
Further rate rises remain uncertain
The Reuters survey suggests that seven MPC members will vote in favour of an increase, with external members Alan Taylor and Swati Dhingra expected to support keeping rates on hold.
Both have previously pointed to spare capacity in the economy as a reason to delay tightening monetary policy, although recent economic growth figures have been stronger than expected.
Other policymakers, including Chief Economist Huw Pill and external members Catherine Mann and Megan Greene, have been critical of the Bank’s approach to the current inflation situation.
However, they may not support the scale of future increases currently expected by financial markets. Investors are pricing in another three to four quarter-point rises during 2027, which would take the base rate to between 4.75% and 5%.
Alexander Harvey, UK economist at Oxford Economics, said the Bank may avoid giving a clear indication of how many further increases it expects. However, the meeting minutes or Bailey’s comments could suggest that rates are unlikely to reach the levels currently anticipated by investors.
Statements from individual MPC members are also expected to provide clues about the direction of interest rates, particularly given the close divisions among the Bank’s internal members.
Budget and inflation outlook in focus
Economists remain divided over whether further rate increases will follow November’s expected move. In an earlier Reuters survey, they were split on the likelihood of additional rises.
Mann has argued that expectations of aggressive rate increases partly reflect uncertainty created by the Bank’s cautious approach following the outbreak of conflict in the Middle East. She believes the Bank could have communicated more clearly that it would act to keep inflation under control.
Investors will also be looking for the Bank’s initial assessment of the latest Budget, delivered by Chancellor John Healey last week, alongside its updated economic forecasts.
The Budget included some limited support for households and motorists facing higher energy costs, with part of the funding coming from a tax on banks. However, economists believe these measures will only have a small impact on the expected rise in inflation.
The Bank of England is due to announce its interest rate decision at 12pm GMT on Thursday. Bailey and several deputy governors are scheduled to hold a press conference at 12.30pm.
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