Three of nine rate-setters voted in September to raise Bank Rate to 4%, and three of those who held have since signalled they may join them. The case rests on an energy shock that, so far, has not spread into pay.
The Bank of England is moving towards raising interest rates, and anyone with debt that tracks Bank Rate would feel it first. On 17 September its Monetary Policy Committee held Bank Rate at 3.75% by six votes to three. Megan Greene, Catherine Mann and Huw Pill wanted 4%.1
Since then the case has strengthened inside the majority. Deputy Governor Sarah Breeden said on 24 September it was “increasingly appropriate” for Bank Rate to respond to inflation risks.5 Her colleague Clare Lombardelli said rates would likely need to rise if energy prices stayed high, unless the economy clearly weakened.2 Governor Andrew Bailey told the committee policy “may have to tighten” if the conflict persists.1 Two of the six who held would turn 6–3 into 5–4 for a rise. The next decision is on 5 November.
The reason is energy. The Middle East conflict has pushed up oil and gas, and on 14 September Brent crude was $106 a barrel and UK wholesale gas 207 pence a therm.1 Consumer price inflation reached 3.1% in August.3 The Bank said about 0.7 points of the 1.1-point overshoot of its 2% target came directly from energy.1
Interest rates do nothing to the price of gas. Lombardelli said the Bank’s job is to stop a temporary jump in inflation becoming a lasting one, and called “second-round effects” the most pernicious channel: energy costs passing into wages and into prices set at home.2 The larger and longer the shock, she argued, the stronger that risk.
The shock is large. Spot prices had risen 36% for Brent and 78% for gas since the period before the Bank’s July forecast, and the Bank now expects inflation of about 3¾% in the last three months of 2026, up from 3.2% in July, and just over 4% early in 2027.1 Lombardelli put the early-2027 figure at about 4.2%, and said it would be nearer 4.5% without the government’s temporary VAT cut on electricity.2
So far the spread is limited. Lombardelli said indirect effects have been smaller than feared, with firms absorbing costs in their margins, but that this capacity is limited.2 Private-sector regular pay grew 2.9% in the three months to July.1 The minutes recorded little evidence so far of material second-round effects, but judged the risk had risen since July.1
Food is the channel to watch. Lombardelli said food prices weigh heavily on households’ expectations of inflation, and that the Bank expects food inflation to rise towards 4% early in 2027.2 If people come to expect higher prices, she argued, they push harder for pay rises, and firms pass the cost on again. That loop, rather than the energy bill itself, is what the three dissenters want to pre-empt.
Tuesday’s jobs data gives each side something. Unemployment fell to 4.7% and regular pay growth held at 3.7%, but private-sector pay grew 3.0% and the number of payrolled employees fell 0.4% over the year.7 Noodle News looks at why those jobs counts disagree.
A rise from 3.75% to 4% adds £250 a year in interest on every £100,000 of borrowing that tracks Bank Rate, by simple arithmetic: £375 on £150,000 and £500 on £200,000. Fixed-rate borrowers feel changes only when a deal ends, and fixed rates already price in expected rises, so the immediate hit falls on tracker and variable-rate borrowers.
Households face a second squeeze from energy itself. Ofgem’s price cap is £1,723 for October to December,1 and the Resolution Foundation expects bills of around £2,000 from January, close to the peak after Russia’s invasion of Ukraine.8 A rate rise would not lower those bills. It would raise the cost of the borrowing many households use to cope with them.
The government is exposed too. The Resolution Foundation said on 13 October that higher borrowing costs push debt interest about £14bn above the Office for Budget Responsibility’s forecast for 2029–30, and halve the Chancellor’s headroom from £24bn to £12bn.8 The Institute for Fiscal Studies puts headroom nearer £20bn, as Noodle News reported on 19 October. Either way, the Bank’s decision lands a week after the Budget. The committee also voted unanimously in September to keep shrinking its £488bn stock of gilts, with sales of £20bn a year, so the Bank is both raising the price of short-term money and adding to the supply of government debt the market must absorb.1
Whether September inflation, which the ONS publishes on 21 October, came in above or below the Bank’s path; it was not available when this was written. Whether Bailey, Breeden, Lombardelli, Ramsden or Taylor will vote for a rise. Whether firms keep absorbing energy costs.
The ONS publishes September inflation on 21 October. Chancellor John Healey delivers the Budget on 28 October, with new Office for Budget Responsibility forecasts. The Monetary Policy Committee announces its decision on 5 November. Bank Rate would need two more votes to rise, and the committee says it cannot offer firm guidance on the path.2