The Bank of England will probably raise interest rates again next month and in early 2027 to combat rising inflation, the central bank's chief economist has said. Huw Pill told the Financial Times that while the decision to increase rates from 3.75% to 4% earlier this month was a "significant step" towards getting monetary policy on track, "we have further to go". Pill said he expected to see evidence that would motivate further rate rises and that the Bank would "do what is necessary to get inflation back to 2% through time".
The forecast signals sharp increases in mortgage payments for an estimated 2.3 million homeowners who will need to refinance their loans next year. Financial markets expect UK interest rates to rise to almost 5% in 2027, which Pill described as "not outrageous". He indicated the Bank's "ability to be modest" in the scale of rate rises "has diminished", hinting at larger increases at upcoming meetings of the monetary policy committee. The committee is due to make its next decision on 17 December.
Inflation is expected to rise to 5% in spring next year, driven by high oil and gas prices stemming from the Iran war, according to Pill. He warned that workers in both public and private sectors will demand substantial pay rises in response, which could keep inflation high for longer. Pill said he considered an end to the US-Israeli conflict with Iran and a fall in energy prices to be "a very low probability", indicating he was prepared to vote for another quarter-point increase next month. He acknowledged the central bank "waited too long" before acting to combat inflation.
The UK economy has strengthened over the past year, handing workers greater power to bid up wages. The economy grew by 0.7% in the third quarter to deliver annual growth surpassed only by the United States among the G7 group of wealthy countries. While the Bank has not yet seen evidence of wage increases or companies passing higher costs to consumers, Pill said the absence of such evidence was not conclusive. "As we go into next year, we will begin to see some evidence, and it could play out in one direction or another," he said.
However, there is disagreement among analysts about the strength of the economy. Many are concerned that further interest rate increases will damage the manufacturing sector and construction industry, which has contracted for much of the year. Households are also expected to cut back on spending in the new year, when the energy price cap is forecast to rise to almost £2,000 for a typical home and council tax bills are expected to increase by an average of almost 5%.