The Bank of England likely faces further interest rate increases in the coming months, extending into early 2027, as it continues its effort to curb rising inflation. Chief economist Huw Pill noted that while the recent decision to nudge rates from 3.75% to 4% marked a significant step forward, the institution maintains that there is further to go. According to ‘We have further to go,’, Huw Pill after increase to 4% last month as Bank seeks to tackle rising inflation.
Speaking to the Financial Times, Pill emphasized that the central bank remains committed to doing what is necessary to steer inflation back to its 2% target over time. He indicated that upcoming economic data will likely provide the justification for continued monetary tightening. This outlook suggests a difficult period ahead for approximately 2.3 million homeowners who are slated to refinance their mortgage agreements next year. “As we go into next year, we will begin to see some evidence, and it could play out in one direction or another – we’ll see.”.
The UK economy has demonstrated unexpected resilience, growing 0.7% in the third quarter—a performance eclipsed only by the US among G7 nations. This strength has emboldened workers in both public and private sectors to pursue higher wages. However, Pill warned that such wage demands, coupled with the inflationary pressures of high energy prices linked to the Iran conflict, risk sustaining high inflation for a longer duration. To give an annual rate of growth that was only surpassed by the US among the G7 group of wealthy countries, recent figures showed the economy grew by 0.7% in the third quarter. Driven by high oil and gas prices as a result of the Iran war, Pill expects public and private sector workers to demand substantial pay rises, which would keep inflation high for a longer period, with inflation expected to rise to 5% in spring next year.
Pill characterized a potential end to the US-Israeli conflict with Iran or a swift decline in energy prices as having a very low probability. He expressed regret that the Bank did not act sooner, stating that he believes the institution waited too long to address inflationary trends. While the Bank has not yet observed definitive proof of wage-price spirals or businesses successfully passing on rising costs, Pill stressed that an absence of current evidence does not equate to an absence of the trend. “My bias, for what it’s worth, is that I worry about the inflationary impact being magnified by second-round effects,” he said, adding that he believed the central bank should have acted sooner to combat inflation. “In my view, we waited too long.”.
Financial market forecasts currently align with expectations of interest rates reaching nearly 5% by 2027. Pill described these projections as reasonable and indicated that his willingness to support modest rate adjustments has waned. Consequently, he appears prepared to vote for additional quarter-point hikes at upcoming meetings of the monetary policy committee.
Analysts increasingly view a December rate increase as virtually certain, though debate persists regarding the broader economic impact. Critics remain concerned that sustained borrowing costs will disproportionately damage the manufacturing and construction sectors, both of which have struggled with contraction this year.
Consumer strain is also expected to mount in the new year as the energy price cap nears £2,000 for typical households. Alongside projected 5% increases in council tax bills, these financial pressures are likely to force significant reductions in overall household spending, complicating the economic outlook as the Bank of England maintains its hawkish stance on monetary policy.
