Policymakers at the Bank of England will gather on Thursday for their next meeting, where they are widely expected to leave interest rates unchanged. The decision comes down to a hard choice between two competing goals: keeping rates steady to protect jobs, or pushing them up to address inflation that has moved above target.
Nine policymakers sit on the Monetary Policy Committee (MPC), which convenes against a backdrop of climbing oil costs across the globe and higher interest rates elsewhere. Experts anticipate the MPC will keep the Bank’s benchmark rate unchanged at 3.75%, marking its sixth straight meeting without a change. Still, some analysts doubt whether that calm will last, with disagreement over whether the rate will eventually rise before the year ends.
Thursday’s announcement comes at 12:00 BST. The Bank rate holds great weight since it serves as a guide for banks and other lenders when they determine interest on borrowing and saving. Should the rate rise, loans become more costly while savings returns may grow.
What the MPC has said
The Monetary Policy Committee suggested at its last meeting at the close of July that it might increase the Bank rate should the conflict with Iran worsen. Governor Andrew Bailey made the remark to the BBC, saying “If we get a continuation of this conflict going on and oil prices stay above $100 a barrel… the odds are that interest rates will have to go up higher.”.
Oil prices moved above the $100 (£74) level on 9 September and have stayed there since. There are few signs of a lasting truce in the Iran war.
The Bank controls inflation by adjusting interest rates, a measure of how much the cost of living rises over time. Its goal is 2%. Figures published on Wednesday revealed that the Consumer Prices Index (CPI) measure of inflation climbed to 3.1% in August, up from 2.9% in July, marking the highest rate in six months.
The push came from the cost of petrol, diesel and airfares going up. Economists believe that higher global energy costs will work their way into food and fuel prices, which means inflation has not reached its highest point yet.
The international picture
The MPC will note that the European Central Bank recently raised interest rates to 2.5%, citing the Middle East conflict and warning that inflation was “set to remain well above” its 2% target for some time. The US Federal Reserve raised its rate to 3.5%-3.75% on Wednesday for similar reasons.
Members of the Monetary Policy Committee want to keep the pressure off employers and protect job prospects for people looking for work. Households face higher borrowing costs when the Bank rate rises, though they can gain from better savings rates.
Lenders are already moving
A host of major lenders have raised the cost of new fixed-rate mortgages in recent days, a move tied to the broader expectation that the Bank rate will rise.
Moneyfacts reports that the average two-year fixed-rate residential mortgage has reached its highest level since 11 May, at 5.77%. Meanwhile, the average five-year rate stands at its highest point since 8 November 2023, at 5.83%.
Andrew Montlake, chief executive of mortgage broker Coreco, said the latest data showed that “the inflation dragon has not been fully slain”.
“If inflation proves sticky, lenders’ funding costs stay under pressure, which makes cheaper mortgages harder to deliver,” he said.
Borrowers should watch out for several things:
- Lenders are repricing upwards, which is doing little to calm things down
- Borrowers should not panic, but anyone approaching the end of a fixed rate should start looking early
- Securing an option and keeping it under review is part of the advice given
What savers should watch
People who put money aside might receive better rewards on it, though the purchasing power of those savings could fall because prices keep going up.
“It’s almost impossible to time things just right, so I would urge households to focus on what’s best for them now, in the medium term and in the longer term,” said Harriet Guevara, chief savings officer at Nottingham Building Society.
The advice for savers is to regularly check that your savings are earning a competitive return and that you have the right balance between easy access and money you can afford to put away for longer.
The MPC’s dilemma
The MPC’s position is uncomfortable. Inflation is rising towards 3.1%, well above the 2% target, and the conflict with Iran shows no sign of ending soon. Oil prices remain above $100 a barrel.
Tightening borrowing costs by raising rates would likely slow economic growth and weaken the labour market, which would hurt job prospects for people looking for work.
Allowing inflation to continue unchecked by keeping interest rates steady would instead be the danger, since it would eat away at the value of wages and savings over time.
The path forward
For five meetings running, the MPC has held interest rates steady, and experts see no change coming on Thursday. The open question is whether the committee will end its run of calm before the year closes.
In July, Bailey indicated he was ready to increase interest rates should the war intensify. The committee will weigh that possibility alongside a broader look at how the economy is faring, with particular attention to how well the jobs market is holding up.
On Thursday, the Bank’s choice will probably depend on what the Monetary Policy Committee decides about inflation. It could conclude that rising prices are becoming fixed, or it could believe the current rate of price growth can be brought back under control without tightening credit.
What borrowers should do
Montlake advises borrowers nearing the close of a fixed-rate mortgage to begin comparing offers immediately, because the period when rates remain low is closing and lenders are moving their prices upward.
He urged borrowers not to panic, but to act early.
Guevara advised that savers should look over their accounts, telling households to concentrate on what works best for them right now, over the next few years, and down the road.
The advice was to make sure that whatever money people have set aside is bringing in a fair rate of interest, and that they hold it in the right mix: some cash kept handy for quick use, and some saved up for a longer period, which they can afford to tie up.
The stakes for households
For households, the central bank’s decision will shape daily life. The MPC’s task is to thread the needle between protecting jobs and controlling inflation. Both goals are important, but they pull in opposite directions.
On Thursday, the committee will assess the evidence to determine if the economy can handle a higher rate, or if the dangers of increased borrowing costs exceed their advantages.
What happens next
Thursday will see the MPC’s decision revealed at 12:00 BST, with the path of interest rates hinging on what happens to inflation between now and the announcement.
If prices continue to rise, the pressure to hike will grow.
Households will feel the consequences whichever way the Bank of England decides, and the MPC’s decision on Thursday will be closely watched. The path forward remains uncertain, but one thing is clear: the Bank faces a tough choice.
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