UK interest rates are expected to remain unchanged at 3.75% when the Bank of England announces its latest decision on Thursday, despite inflation accelerating and global energy prices increasing amid the prolonged conflict in the Middle East.
The Bank of England’s nine-member Monetary Policy Committee (MPC) has been meeting as higher energy costs and interest rate increases in other major economies add pressure to the outlook for UK inflation. Economists expect the Bank rate to remain at 3.75% for a sixth consecutive meeting.
However, there is greater uncertainty over whether UK interest rates could rise before the end of the year. The latest decision is due to be announced at 12:00 BST on Thursday.
UK Interest Rates Face Inflation Pressure
The Bank rate influences the rates charged by banks and other lenders to households and businesses, while also affecting returns available to savers.
At its previous meeting in July, the MPC indicated that rates could rise if the conflict involving Iran intensified. Bank of England governor Andrew Bailey warned at the time that if the conflict continued and oil prices remained above $100 a barrel, “the odds are that interest rates will have to go up higher.”
Oil prices moved above $100 (£74) a barrel on 9 September and have remained above that level. There have also been few indications of a lasting truce in the conflict, adding to concerns about further pressure on energy costs.
The Bank uses interest rates as one of its main tools for controlling inflation and aims to keep the rate at 2%. However, official figures published on Wednesday showed that Consumer Prices Index inflation increased to 3.1% in August from 2.9% in July.
The latest inflation reading was the highest in six months, with higher petrol, diesel and air travel costs contributing to the increase. Economists expect higher global energy prices to continue feeding through into household food and fuel costs, suggesting inflation may not have reached its peak.
Bank of England Weighs Rate Hike Risks
The international backdrop is also complicating the outlook for UK interest rates. The European Central Bank recently raised its interest rate to 2.5%, citing the Middle East conflict and warning that inflation was “set to remain well above” its 2% target for some time.
The US Federal Reserve also raised its interest rate to a range of 3.75% to 4% on Wednesday, with similar concerns contributing to the decision.
For the Bank of England, however, higher borrowing costs could create additional difficulties for employers and weaken prospects for people looking for work. Policymakers therefore face pressure to balance persistent inflation against conditions in the wider economy.
Dame DeAnne Julius, a former MPC member, said there was a “reasonable chance” of an interest rate increase. However, she told the BBC’s Today programme that she did not believe the UK economy was deteriorating, pointing to steady unemployment and economic growth that was “quite a bit better than it has been”.
“Our economy is in transition… I think it is actually improving,” she said.
Mortgage Rates Rise as Inflation Stays High
Households are already feeling the impact of the changing outlook through borrowing and mortgage costs. Major lenders have increased the cost of new fixed-rate mortgages in recent days, partly reflecting expectations that the Bank rate could remain higher for longer.
Andrew Montlake, chief executive of mortgage broker Coreco, said the latest inflation figures showed that “the inflation dragon has not been fully slain”.
He warned that persistent inflation could keep lenders’ funding costs under pressure, making cheaper mortgages more difficult to secure. Montlake said borrowers should not panic but advised those approaching the end of a fixed-rate mortgage to begin reviewing their options early.
According to Moneyfacts, the average two-year fixed residential mortgage rate has reached 5.77%, its highest level since 11 May. The average five-year fixed rate is 5.83%, its highest since 8 November 2023.
Savers can potentially benefit from higher interest returns as rates rise, although increasing living costs can reduce the purchasing power of their savings. Harriet Guevara, chief savings officer at Nottingham Building Society, advised savers to regularly check whether their money is earning a competitive return and whether their savings are appropriately divided between easy-access accounts and longer-term options.