The Bank of England's Monetary Policy Committee (MPC) is anticipated to maintain its benchmark Bank Rate at 3.75% during its meeting on Thursday, marking the sixth consecutive time rates have been held steady. This decision comes despite a backdrop of increasing global energy prices and interest rate hikes by other central banks, such as the U.S. Federal Reserve, which raised borrowing costs a day earlier. Most economists polled by Reuters last week expected the BoE to hold rates for the remainder of the year, with only three of the nine MPC members expected to vote for a hike this week.
Inflation, as measured by the Consumer Prices Index (CPI), rose to 3.1% in August from 2.9% in July, reaching its highest rate in six months and moving further away from the Bank's 2% target. This acceleration was primarily driven by increases in the cost of petrol, diesel, and airfares. Analysts predict that inflation could peak at almost 4% in early 2027 before gradually returning to 2% in 2028, largely due to impending energy bill increases from October, with Ofgem's next energy price cap expected to raise household energy bills by 4% for typical dual-fuel households.
While the MPC is expected to hold rates, a growing number of economists and financial markets suggest that mounting inflationary pressures could force a rate hike before the end of the year. Some major lenders have already increased the cost of new fixed-rate mortgages in recent days, with the average two-year fixed residential mortgage rate now at 5.77% and the average five-year at 5.83%. Despite the pressures, including a recent surge in Brent crude oil prices above $107 a barrel, policymakers are likely to adopt a "wait-and-see" approach regarding the impact of the Middle East conflict on the UK economy. However, some experts believe the MPC might toughen its language to signal a potential November hike if energy prices continue to escalate.
