Bank of England set to keep interest rates on hold despite rising inflation

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The Bank of England is expected to hold interest rates at 3.75% but economists have warned that pressure to hike rates is mounting as inflation rises.

Most economists think the Bank’s Monetary Policy Committee (MPC) will opt to keep interest rates unchanged at its next meeting on Thursday.

It would be the sixth time in a row that the MPC has kept rates on hold, having stayed the same since December.

Experts think policymakers will continue to favour a “wait-and-see” approach particularly to the Middle East conflict and how it is impacting the UK economy.

However, three members of the nine-person MPC – Huw Pill, Megan Greene and Catherine Mann – voted to hike rates to 4% at the last meeting, and economists expect the same outcome at the next one.

It comes against a backdrop of rising prices in the UK, with Consumer Prices Index (CPI) inflation increasing to 3.1% in August, from 2.9% in July, according to the latest official figures.

This marked a five-month high and shows CPI inflation has moved further away from the Bank of England’s 2% target rate.

Many economists are forecasting the cost-of-living to rise further, with households facing another rise in their energy bills from next month, which could prompt the Bank to raise interest rates in the months ahead.

Experts pointed out that services inflation – which reflects prices in the UK’s dominant industry – stayed at 3.4% in August, indicating a lack of so-called second round effects –  meaning things such as wage demands and broader shop price increases.

However, inflation is expected to be pushed up when Ofgem’s next energy price cap kicks in from October, which will see household energy bills rise by 4% for a typical dual-fuel household.

Thomas Pugh, chief economist at RSM UK, said: “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.

“We now see inflation peaking at almost 4% in early 2027, before gradually dropping back to 2% in 2028.

“The MPC will hold this week, but inflation at 4% is realistically too hot to ignore.”

Charlotte O’Leary, associate economist for the National Institute of Economic and Social Research (Niesr), said the MPC will also be paying attention to the recent surge in oil prices, with Brent crude oil rising above 107 dollars a barrel this week.

“Nevertheless, with limited evidence of second-round effects so far, we expect the MPC to hold rates on Thursday,” she said.

“However, mounting inflationary pressures, alongside resilient growth data, may eventually grant scope to raise rates without materially damaging the economy.”

Economists for Pantheon Economics said there is a chance the MPC “toughens its language” at the next rates announcements “to open up the possibility of a November hike if energy prices keep ramping up”.

“A 4% inflation peak would already be too hot to hold, but further energy price rises could take inflation even higher,” they said.

“The MPC needs to be ready.”

Last week, the European Central Bank raised its interest rates for the second time this year, warning that the Iran war continues to generate inflationary pressure.

Furthermore, the US Federal Reserve is widely expected to hike its rates for the first time since 2023 on Wednesday evening.