The Bank of England is expected to leave interest rates unchanged at 3.75 per cent this week, but economists are warning that policymakers may need to prepare for another increase if surging energy prices drive inflation higher.
Most economists expect the Monetary Policy Committee to hold Bank rate at its meeting on Thursday September 17, which would mark the sixth consecutive decision without a change since rates were last adjusted in December.
The MPC is likely to maintain a cautious approach as policymakers assess the economic consequences of the conflict in the Middle East and its impact on energy prices, household finances and business costs.
But the committee remains divided. Three of its nine members — Huw Pill, Megan Greene and Catherine Mann — voted at the previous meeting to raise rates to 4 per cent, and economists expect them to repeat that call.
Matt Swannell, chief economic adviser to the Item Club, said: “It looks a near certainty that the MPC will leave Bank rate unchanged at 3.75%.
“However, we expect divisions among rate-setters to remain, with July’s three hawks – Huw Pill, Catherine Mann and Megan Greene – again favouring an immediate rate increase.
“With the decision largely seen as a done deal, attention will instead focus on the committee’s communications, particularly on whether the doves have moved towards accepting the possibility of future rate rises.”
The central bank faces a difficult inflation backdrop. Consumer price inflation rose to 2.9 per cent in July from 2.6 per cent in June, its highest level since March.
There were, however, signs that underlying domestic price pressures were easing. Services inflation fell from 3.6 per cent to 3.4 per cent, reducing concerns about so-called second-round effects as higher prices feed into wage demands and businesses’ pricing decisions.
Energy markets threaten to complicate that picture.
Ofgem’s next energy price cap takes effect in October and is expected to increase household energy bills by 4 per cent for a typical dual-fuel household. Further increases in wholesale energy prices could push headline inflation substantially higher.
At the same time, the economy has shown unexpected resilience. Official figures showed GDP expanding by 0.4 per cent in July, driven by strength in parts of the services sector.
The combination of stronger growth and renewed inflationary pressure could make it harder for the MPC to justify further rate cuts later this year.
Economists at Pantheon Economics said the committee could “toughen its language” this week “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.”
Thomas Pugh, chief economist at RSM UK, said the MPC “would need to respond” if higher inflation began feeding into wages and business prices.
“The problem is that the energy shock is becoming harder to look through. Higher energy prices will lift headline inflation over the coming months,” he said, predicting inflation could peak at almost 4 per cent in 2027.
The Bank therefore faces a delicate balancing act: holding rates at 3.75 per cent while signalling that renewed energy-driven inflation could force it back into tightening mode.
The European Central Bank raised rates for the second time this year earlier this week, warning that the Iran war continued to generate inflationary pressure.
For the Bank of England, Thursday’s decision may therefore be less about what happens to rates now than whether policymakers begin preparing markets for what could come next.
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