Bank of England Signals Further Rate Hikes as Inflation Risks Persist

The Bank of England will likely need to raise interest rates again in the coming months and into early 2027 to curb resurgent inflation, according to the central bank’s chief economist.

In comments that signal higher mortgage costs for an estimated 2.3 million homeowners facing refinancing next year, Huw Pill stated that while the recent decision to lift rates from 3.75% to 4% marked a “significant step” toward appropriate monetary policy, “we have further to go.”

Speaking to the Financial Times, Pill said: “My view would be, we will see evidence that motivates further rises,” emphasizing that the central bank would “do what is necessary to get inflation back to 2% through time.”

The chief economist is among several policymakers who believe the UK economy has strengthened over the past year, giving workers leverage to push for higher wages. Recent data showed the economy expanded 0.7% in the third quarter, yielding an annual growth rate surpassed only by the United States among G7 nations.

With inflation projected to climb to 5% next spring—driven by elevated oil and gas prices stemming from the Iran conflict—Pill anticipates that both public and private sector workers will demand substantial pay increases, potentially keeping inflation elevated for longer.

Pill assessed the probability of a resolution to the US-Israeli confrontation with Iran and a subsequent drop in energy prices as “very low,” signaling his readiness to support another quarter-point increase next month.

“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 in his view, the central bank “waited too long” to act against inflation.

While the Bank has not yet observed evidence of accelerating wage growth or firms passing higher costs to consumers, Pill cautioned that “absence of evidence is not evidence of absence.”

“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.”

Financial markets currently price UK interest rates rising to nearly 5% in 2027. Pill described these expectations as “not outrageous,” hinting he could support larger increases at upcoming Monetary Policy Committee meetings because the “ability to be modest [in the scale of rate rises] has diminished.”

City analysts interpret the increasingly hawkish rhetoric from Pill and other MPC members as making a December rate hike almost certain. However, disagreement persists over the economy’s resilience, with many warning that further borrowing cost increases could damage manufacturing and construction sectors, the latter having contracted for much of the year.

Households are also expected to rein in spending in the new year, when the energy price cap is forecast to reach nearly £2,000 for a typical home and council tax bills rise by an average of almost 5%.

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