Bank of England set to hike interest rates to 4% to tackle rising inflation

The Bank of England is poised to hike interest rates for the first time in more than three years, economists think.

Rate-setters are widely expected to tighten monetary policy in a bid to tackle rising inflation in the UK economy.

Traders in the financial markets are predicting that rates will increase to 4% from 3.75% when the Bank’s Monetary Policy Committee (MPC) announces its next decision on Thursday.

This would be the first time that the central bank increases borrowing costs since August 2023, and means that mortgage holders could be facing a squeeze.

Pressure on the MPC to take action has grown since official figures showed the rate of Consumer Prices Index (CPI) inflation rose to 3.5% in September, the highest level in 11 months.

The conflict in the Middle East has helped push CPI further away from the Bank’s 2% target rate, with a surge in petrol and diesel prices a major driving force.

And inflation is expected to be pushed higher this winter after Ofgem’s energy price cap rose by 3.6% for a typical household on October 1 and is forecast to jump by a further 22% in January.

Ellie Henderson, an analyst for Investec, said: “We imagine that many committee members’ patience with the recent rise in inflation has worn thin.

“The longer energy prices remain elevated, the greater the risk that a temporary price shock becomes more permanent; a ‘risk management’ hike could guard against this.”

She cautioned that producers might “not be willing or able to shoulder the burden of higher energy prices for much longer” and that this could push up prices in shops.

Alexander Harvey, UK economist for Oxford Economics, said a November rate hike looks to be a “done deal” for the committee, which will be responding to higher oil and gas prices.

“So far, two factors have been central to the MPC’s decision-making since the outbreak of the conflict in the Middle East: the scale and duration of the energy price shock, plus the extent of any second-round inflation effects from elevated energy prices,” he said.

“These factors will continue to dominate the outlook for Bank rate.”

He said the key thing economists will be looking out for is any signal from the Bank as to where interest rates could go from here, with the financial markets expecting further hikes into 2027.

Other central banks have already increased their interest rates, including the US Federal Reserve which did so last month for the first time in three years.

The MPC will also take into account other economic indicators including that the UK’s unemployment rate fell to the lowest level in more than a year in the three months to August, to 4.7%.

Furthermore, the economy unexpectedly grew in August, by 0.1%, suggesting resilience in the UK despite pressure on consumer spending and wider volatility because of the Iran war.