Interest rates have been on hold since they were cut in December 2025. But with inflation on the rise, will the Bank of England’s Monetary Policy Committee hike interest rates?
The Bank of England’s ratesetting committee held interest rates for the sixth consecutive time in September.
The bank’s Monetary Policy Committee (MPC) voted to keep the base rate at 3.75%, with the motion passing by six votes to three as ratesetters remained in “wait-and-see” mode.
The hold was widely predicted by economists despite other central banks, like the European Central Bank (ECB) and the United States’ Federal Reserve, choosing to hike interest rates.
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However, as inflation is now growing faster than expected – rising to 3.5% in the year to September – more experts are now expecting the MPC to hike rates in the coming months.
How is inflation influencing interest rates?
The MPC uses economic data to help inform its interest rates decisions, and one of the most important is the rate of inflation. This is because the Bank of England has a mandate to keep price growth under control.
The Bank’s inflation target, like that of most western central banks, is 2%, which economic consensus says is a healthy level of inflation that stimulates spending while keeping prices under control.
The main way the central bank works to achieve this goal is by increasing or decreasing interest rates.
Broadly speaking, when inflation is too high, the MPC will raise interest rates, and when it is too low it will lower them.
These are not the only two reasons why interest rates are moved, though. For example, rates might be lowered if economic growth is too slow, to help boost the economy.
UK inflation has been above the 2% target since September 2024.
Although inflation started to wind down in the second half of 2025, the Iran war, which started on 28 February 2026, caused it to start rising again.
The latest official inflation figures showed the Consumer Prices Index (CPI) rose by 3.5% in the 12 months to September, up from 3.1% in the year to August.
This rise was widely forecast and is consistent with expectations that inflation will continue to accelerate for the rest of 2026, and likely the start of 2027.
With price growth set to remain above 2% in the short and possibly medium term, it is incredibly unlikely that the Bank of England will decide to cut interest rates.
It seems more likely that the MPC may decide to hike interest rates to keep prices under control.
The rest of the economic background
Inflation is not the only data the MPC uses to make base rate decisions. Another key metric is the state of the labour market.
A softer labour market with higher unemployment and poor wage growth is a disinflationary pressure in the economy, while strong wage growth and full employment drives up inflation.
The latest set of labour market data, published on 20 October, showed unemployment fell to 4.7% in the three months to August, down from 4.9% in the three months to July.
At the same time, annual wage growth was 3.7% for both regular earnings (excluding bonuses) and total earnings (including bonuses) in the three months to August.
This was led by the public sector, where regular wages grew by 6.3% in the three months to August while private sector regular earnings grew by just 3% in the same period.
Meanwhile, the UK economy grew by 0.1% in August, down from 0.4% growth in the month prior.
Will interest rates fall in 2026?
Between August 2024 and December 2025, the Bank of England cut interest rates six times – roughly once a quarter, and each time by 0.25 percentage points.
That cutting trend brought the base rate down from a recent high of 5.25% to 3.75% in December 2025.
At the start of the year, most economists thought this quarterly cutting trend would continue, bringing interest rates down to around 3.25%.
However, after the Iran war began on 28 February and it became clear that the UK would have to grapple with increased inflation, the MPC voted to keep interest rates at 3.75%.
Considering that inflation is expected to average 3.75% in the final quarter of 2026 and 4% in the first quarter of 2027, there is little chance the MPC will cut rates any time soon.
Instead, more economists are now expecting the MPC to increase interest rates in the coming months.
A vocal minority of the MPC have been calling for a rate hike since April, with the group now growing to three members: Catherine L Mann, Megan Greene, and the Bank’s chief economist Huw Pill.
They argue that raising interest rates sooner rather than later will do a better job of protecting the UK from inflation if the inflationary shock is worse than expected.
The risk of moving interest rates too late would be worse than the potential economic hit from hiking them too early, they said.
Despite rising inflation, those who want to hike rates are still a minority within the MPC, but forecasters now expect more members to come around to this thinking.
Deutsche Bank now anticipates that the MPC will raise interest rates twice in the coming months.
Following the announcement that inflation rose to 3.5% in the year to August, David Rees, head of global economics at asset manager Schroders, said: “The key question for the Bank of England is whether this external shock starts to leak into domestic wages and prices.
“Stronger growth and labour-market data point to an earlier recovery than we had assumed, while leading indicators of core services inflation are turning higher. That combination means a November rate hike now looks like a done deal.”
Rees said Schroders believes tighter financial conditions from a rate hike will weigh on growth, push inflation down, and ultimately avoid the need for a prolonged period of higher interest rates.
However, he warned: “The UK’s relatively low potential growth rate means that even a modest pickup in demand could quickly reignite domestic price pressures.”
Charlie Ambler, co-chief investment officer at Saltus, said: “For the Bank of England the question is less whether inflation is rising, but more whether it is feeding into wages and prices more broadly.
“Three MPC members already voted for a rise in September and the pressure to do so again remains high. A figure at or above expectations would strengthen the case for lifting rates to 4%, a move most economists now expect.”
Ambler added that the upcoming Autumn Budget will also be a major consideration for the MPC before their next meeting on 5 November as any new policies that add to price pressures “will make the Bank’s job harder”.
Rees echoed the worry that the Budget may increase inflation, saying: “Expectations are low, but any significant fiscal boost would raise the risk that imported inflation becomes more persistent and force the BoE into a longer tightening cycle.”
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Daniel is a financial journalist at MoneyWeek, writing about personal finance, economics, property, politics, and investing.
He covers savings, political news and enjoys translating economic data into simple English, and explaining what it means for your wallet.
Daniel joined MoneyWeek in January 2025 and previously worked at The Economist in their Audience team. He read history at Emmanuel College, Cambridge and edited Cambridge's student newspaper, Varsity.
In his free time, he likes reading, walking around Hampstead Heath, and cooking overambitious meals.