Economists have warned that pressure to increase rates is mounting as inflation rises to a five-month high
The Bank of England is expected to maintain interest rates at 3.75 per cent, though economists have cautioned that pressure to increase rates is building as inflation climbs, reports BritPanorama.
Most economists believe the Bank’s Monetary Policy Committee (MPC) will choose to leave interest rates unchanged at its forthcoming meeting on Thursday. It would mark the sixth consecutive occasion the MPC has held rates steady, having remained at the same level since December.
Experts indicate that policymakers will persist with a “wait-and-see” strategy, particularly in light of the ongoing Middle East conflict and its ramifications for the UK economy.
Despite this, three members of the nine-strong MPC – Huw Pill, Megan Greene, and Catherine Mann – voted to raise rates to four per cent at the previous meeting, and many economists anticipate a similar outcome at the upcoming decision.
This comes amid a backdrop of rising prices in the UK, with Consumer Prices Index (CPI) inflation climbing to 3.1 per cent in August, up from 2.9 per cent in July, according to the latest official data. This figure represents a five-month high and indicates that CPI inflation has drifted further from the Bank of England’s target rate of two per cent.
Numerous analysts are predicting that the cost of living will continue to rise, with households facing another increase in energy bills from next month, potentially prompting the Bank to lift interest rates in the coming months.
Experts note that services inflation, reflecting pricing trends within the UK’s dominant sector, held steady at 3.4 per cent in August, suggesting an absence of so-called second-round effects like escalating wage demands and broader increases in shop prices.
However, inflation is widely anticipated to rise once the next energy price cap from Ofgem is implemented in October, which will push household energy bills up by four per cent for a typical dual-fuel household.
Thomas Pugh, chief economist at RSM UK, stated, “The rise in inflation in August is just the start of a new upward trend as higher energy, food, and memory chip prices continue to make their way through supply chains.” He further noted that inflation is expected to peak at almost four per cent in early 2027, with the MPC likely to hold rates this week, but “inflation at four per cent is realistically too hot to ignore.”
Charlotte O’Leary, associate economist at the National Institute of Economic and Social Research (Niesr), mentioned that the MPC would be monitoring the recent surge in oil prices, as Brent crude oil rose above 107 dollars a barrel this week. “However, with limited evidence of second-round effects so far, we expect the MPC to hold rates on Thursday,” she commented.
“Mounting inflationary pressures, alongside resilient growth data, may eventually provide scope to raise rates without significantly harming the economy,” O’Leary added.
Economists at Pantheon Economics suggested that there is a possibility the MPC will “toughen its language” in the next rate announcement “to open up the possibility of a November hike if energy prices keep ramping up.”
“A four per cent inflation peak would already be too hot to maintain, but further energy price rises could push inflation even higher,” they cautioned. “The MPC needs to be ready.”
In related news, the European Central Bank raised its interest rates for the second time this year last week, highlighting the inflationary pressures stemming from the conflict in Iran. Meanwhile, the US Federal Reserve is widely expected to raise its rates for the first time since 2023 this Wednesday evening.
This economic discourse underscores a significant balancing act facing central banks globally as they navigate rising inflation amidst complex geopolitical dynamics. The Bank of England, while maintaining a cautious approach, may soon find itself compelled to address escalating inflation in tangible terms, reflecting the interconnected nature of global economics.
