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The
pressure on rate-setters has grown steadily over recent months,
but the rise in inflation to an 11-month high of 3.5% in
September — above their target of 2% — cemented market
expectations of a rate hike this month and potentially more in
2027.
The main cause behind the spike in inflation this year has been
the sharp rise in fuel costs as a result of the Iran war and the
ensuing bottlenecks in the Strait of Hormuz, which have squeezed
global oil and gas supplies.
“We imagine that many committee members’ patience with the
recent rise in inflation has worn thin," said Ellie Henderson,
an economist at Investec. “The longer energy prices remain
elevated, the greater the risk that a temporary price shock
becomes more permanent."
Accompanying the expected rate hike will be the bank’s quarterly
economic projections, notably those for inflation and growth.
Higher interest rates cool the economy by making it more
expensive to borrow, thereby bearing down on spending and
inflation, but growth too.
Other central banks, including the U.S. Federal Reserve and the
European Central Bank, have raised rates recently in response to
rising prices.
Interest rates in the U.K. had been trending downward from a
15-year high of 5.25% until the U.S. and Israel attacked Iran in
late February.
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