The Bank of England is expected to raise interest rates over the next 12 months as policymakers act to curb a rebound in inflation, following its decision on September 17 to hold the base rate at 3.75 per cent for the sixth consecutive time since December 2025.
Higher oil prices, renewed inflation pressures and a global bond sell-off have rattled financial markets. Investors are now betting that the central bank will raise the base rate from 3.75 per cent to 4.75 per cent by September 2027, with rates potentially reaching 5 per cent.
Consumer price index (CPI) inflation stood at 3.1 per cent in the 12 months to August 2026, remaining above the central bank's official 2 per cent target. Headline inflation is expected to reach 3.4 per cent in next month's data, followed by another increase in October when the domestic energy price cap rises by 4 per cent.
Early forecasts for the energy price cap in January suggest household bills could rise by a further 25 per cent, compounding inflation concerns for monetary policy makers. Up until the end of 2025, the central bank had been gradually reducing the base rate from a peak of 5.25 per cent set in August 2023, cutting it to 4 per cent and then to 3.75 per cent in December 2025.
The central bank opted to hold rates steady across six consecutive meetings in 2026. Its next rate decision takes place on November 5, with the majority of financial analysts expecting a rate increase. Financial traders are pricing in four or five quarter-point rate hikes over the next year. While traders anticipated rate cuts at the start of 2026, expectations shifted following Donald Trump's intervention in the Middle East.
Forecasts from leading economists
Ashley Webb, senior economist at Capital Economics, expects the Bank of England to implement two 25-basis-point rate increases, raising the base rate to 4 per cent in November and 4.25 per cent in February.
Webb said: "As long as energy prices don't rise much further, our forecast is for the Bank of England to raise interest rates by 25 basis points twice more, from 3.75 per cent at the next policy meeting in November and to 4.25 per cent in February, rather than a series of rate hikes to 4.75 per cent by the end of next year as investors expect."
Webb added: "What's more, our view that any second-round inflation effects will be muted and CPI inflation will fall back to 2 per cent in late 2027 meaning we expect interest rates to be cut around the end of 2027 and perhaps to 3.5 per cent in 2028." Webb noted that the neutral interest rate remains around 3 per cent, which could be reached around 2029 or 2030, though it could settle at 3.5 per cent.
Andrew Goodwin, chief economist at Oxford Economics, also forecasts 25-basis-point increases in November and February to reach 4.25 per cent. Goodwin said: "We now expect the Bank of England to hike interest rates by 25basis points in November and February, taking Bank Rate to 4.25 per cent. The scale of the increase in oil and gas prices over recent weeks will force the MPC's hand; it's likely to take inflation above 4 per cent in early 2027 and Bank of England research suggests there's a greater chance of high inflation becoming embedded when this threshold is reached."
Goodwin described the moves as "insurance hikes" and projected that the Monetary Policy Committee (MPC) will gradually lower rates back to 3 per cent by 2029.
Conor Parle, eurozone economist at Fidelity International, expects rate hikes in November and February to bring the base rate to 4.25 per cent before holding steady. Parle pointed to rising Ofgem price caps, food price inflation from a dry summer, and indirect energy costs. Parle expects rate cuts to begin in early 2028, eventually moving towards a neutral rate of 3.25 per cent.
David Rees, head of global economics at Schroders, stated that the Bank of England remains the major central bank least likely to respond to energy-driven inflation with rate hikes due to economic slack and domestic inflation running at around 2 per cent. However, Rees noted that energy price increases and potential fiscal expansion in October increase upside risks. Rees indicated a baseline forecast of one 0.25 per cent hike in 2027, but warned that looser fiscal policy could trigger a sustained rate-raising cycle.
Anthony Willis, senior economist at Columbia Threadneedle, anticipates interest rates reaching 4.5 per cent by the summer of 2027 if energy prices remain high. Willis noted that rates will plateau before easing as economic growth slows, emphasizing that the outlook depends heavily on events in the Middle East.
How the Bank of England base rate works
The Bank of England adjusts bank rate, commonly called base rate, to manage inflation. Base rate is the primary interest rate in the United Kingdom, determining the interest paid to commercial banks holding funds with the central bank and influencing borrowing and savings rates across the economy.
Increasing interest rates raises borrowing costs for households and businesses, reducing credit demand and slowing economic activity to curb inflation. Lowering rates reduces mortgage and borrowing expenses, stimulating economic growth. Higher interest rates also encourage saving, whereas lower rates encourage spending.
The Monetary Policy Committee sets interest rates to keep CPI inflation at its official 2 per cent target. Policymakers also track economic growth and unemployment figures. Sluggish growth and high unemployment depress future inflation expectations, giving the central bank scope to cut rates to encourage investment and hiring.
Historical inflation and interest rate trends
A major inflation spike in recent years drove CPI inflation into double digits, caused by the aftermath of Covid-19 lockdowns and an energy crisis linked to Russia's invasion of Ukraine. In response, the Bank of England raised the base rate from a historic low of 0.1 per cent reached during the pandemic.
The central bank initiated rate increases in December 2021 with a move to 0.25 per cent, followed by consecutive hikes that brought the base rate to 5.25 per cent in August 2023. Rates were held at 5.25 per cent before being gradually cut to 3.75 per cent by December 2025.
Mortgage rates re-priced higher by lenders
Mortgage lenders have started re-pricing fixed-rate deals upwards in anticipation of central bank rate increases. Major institutions including NatWest, Santander, HSBC, Lloyds Bank and Barclays announced price increases in September.
Santander increased two-year fixed deals by up to 0.45 percentage points and five-year fixed deals by up to 0.4 percentage points. Financial data provider Moneyfacts reported that the average five-year fixed mortgage rate has reached its highest level since October 2023, with fewer deals remaining below 5 per cent.
Mortgage rates track Sonia swap rates, which reflect long-term market expectations for the central bank base rate, economic conditions, internal bank targets and competitor pricing. When swap rates rise, funding costs for mortgage lenders increase and are passed on to borrowers. One mortgage lender described current funding conditions as a "bloodbath."
Rising mortgage costs affect first-time buyers, homeowners looking to remortgage and buy-to-let landlords. Readers looking to compare deals can use mortgage calculator tools provided by broker London & Country Mortgages (L&C), which is authorized and regulated by the Financial Conduct Authority (FCA).
Impact of higher interest rates on savers
Higher base rates allow savings rates to remain elevated for longer, with easy-access rates expected to rise alongside central bank hikes. Savers can currently obtain around 4.5 per cent in easy-access accounts, while top fixed-rate savings deals pay slightly above 5 per cent.
With CPI inflation running at 3.1 per cent, top-paying savings accounts currently offer a marginal real return before tax. Savers are advised to monitor market offerings regularly to secure competitive rates.
