Bank of England Signals Further Rate Hikes as Chief Economist Warns Inflation Will Persist

The Bank of England is preparing to raise interest rates again next month and potentially into early 2027, driven by persistent inflation pressures across the UK economy. Huw Pill, the central bank’s chief economist, confirmed that policymakers are ready to take further action following the decision earlier this month to lift borrowing costs from 3.75% to 4%. Speaking to the Financial Times, Pill called that increase a significant step toward improving monetary policy, but warned that official work remains unfinished. “My view would be, we will see evidence that motivates further rises,” Pill said, adding that the central bank will “do what’s necessary to get inflation back to 2% through time.”

The warning comes as roughly 2.3 million homeowners prepare to refinance their mortgages next year, facing a steep jump in monthly payments. Market expectations that interest rates could reach nearly 5% by 2027 are “not outrageous,” according to Pill, who indicated that the central bank’s ability to remain modest in its rate hikes has diminished.

Wage Growth and Energy Pressures Drive Inflation Risks

Underlying the hawkish stance is a broader economic expansion. Recent official figures showed the UK economy grew by 0.7% in the third quarter, placing its annual growth rate second only to the US among G7 nations. That economic momentum has strengthened labor market use, enabling workers in both the public and private sectors to push for higher pay. Inflation is projected to hit 5% next spring, fueled in part by elevated oil and gas prices linked to the US-Israeli conflict with Iran. Pill described the prospect of an early end to the conflict or a quick decline in energy prices as a “very low probability.” He expressed concern over second-round effects that could embed high inflation over a longer horizon. Reflecting on past policy decisions, Pill admitted that the central bank delayed its initial response for too long. He noted that while firm evidence of widespread wage spikes or businesses passing cost increases to consumers hasn’t yet materialized, the absence of proof doesn’t mean the risk is gone.

City Analysts Anticipate December Move Amid Broader Headwinds

Financial analysts in the City view the chief economist’s comments as a clear signal that another interest rate increase is likely at next month’s Monetary Policy Committee meeting. However, economists remain divided over whether the wider economy can sustain higher borrowing costs. Critics point to vulnerability in the manufacturing sector and the construction industry, which has faced contraction for much of the year. Consumer spending is also expected to tighten early next year as households confront an energy price cap rising to almost £2,000 for a typical home alongside an average council tax hike of nearly 5%.