Governor Bailey and Deputy Governor Lombardelli explicitly warned ongoing energy shocks could force rate hikes
Bank of England signals higher borrowing costs
Borrowing costs face renewed upward pressure as surging energy prices threaten to push inflation above 4%.
In a nutshell
The Bank of England has signaled that interest rates must climb from 3.75% if Middle East conflicts keep oil and gas prices elevated. After top officials warned that inflation could exceed 4.2% by early 2027, financial markets moved quickly to price in an 80% chance of a rate hike in November and four increases over the coming year.
Highlights
- The Bank of England held its base rate at 3.75% in a 6-to-3 vote before issuing fresh warnings.
- Official projections show inflation reaching 3.7% in late 2026 and topping 4.2% in early 2027.
- Investors now price in an 80% chance of an interest rate increase in November.
- Financial markets have priced in four quarter-point rate hikes over the coming year.
Bank of England inflation forecasts
| Horizon | Projected inflation |
|---|---|
| Target | 2.0% |
| Late 2026 | 3.7% |
| Early 2027 | 4.2% |
- The central bank's projected inflation rate across upcoming quarters compared with its official target.
- Rising utility caps and energy shocks threaten to keep consumer prices rising twice as fast as the central bank aims to permit.
From the Editor’s Diary
When energy supply shocks collide with rigid inflation targets, central banks will raise borrowing costs even if higher rates cannot fix global pipeline and shipping bottlenecks.
Who's involved
Andrew Bailey
Governor of the Bank of England
goal → Return consumer inflation to the official 2% target
Clare Lombardelli
Deputy Governor of the Bank of England
goal → Stop higher energy bills from driving up broader wages
Monetary Policy Committee
The 9-member rate-setting body of the Bank of England
goal → Set borrowing costs to balance growth and keep price increases low
Financial Markets
Global and UK bond and interest rate futures traders
goal → Price future borrowing costs and trade debt contracts
In short
UK households and businesses face higher borrowing costs as persistent energy price spikes threaten to reignite inflation. The Bank of England, the institution setting official borrowing costs across the UK economy, is preparing to raise interest rates to stop higher power and fuel costs from becoming permanent.
The outcome will be another round of rate increases if energy markets do not cool down quickly. Investors now view a rate hike in November as likely, with markets pricing in an 80% chance of an increase at the upcoming meeting.
That path became likely over 48 hours as top policymakers abandoned their neutral posture. The central bank recently kept its main interest rate at 3.75% by a 6-to-3 vote. But official forecasts now show consumer price inflation, the pace at which living costs increase, jumping from its 2% target to 3.7% in late 2026 and exceeding 4.2% in early 2027, driven partly by higher domestic utility caps.
Previously in this story
Bank of England keeps borrowing costs at 3.75 percent
17 September 2026Policymakers freeze the benchmark rate but three dissenters push for an immediate hike as energy costs surge.
How it unfolded
Lombardelli warns policy may tighten
Speaking in Warsaw, Bank of England Deputy Governor Clare Lombardelli warned that sustained energy price increases would force the central bank to raise borrowing costs unless the economy slows down sharply on its own.
Bailey reinforces rate warning
Governor Andrew Bailey reinforced the hawkish message a day later at an Oxford economics panel, stating plainly that holding rates at 3.75% becomes increasingly difficult if high energy costs persist. Investors reacted immediately, sending the implied chance of a November rate rise to 80%.
Where things stand
The Bank of England has signaled a clear readiness to raise interest rates if energy disruptions continue. Whether policymakers follow through at their November meeting depends on whether upcoming UK wage and consumer price figures show energy costs spilling into the wider economy.