An interest rate rise by the Bank of England's Monetary Policy Committee (MPC) at its next meeting in early November now appears more likely, according to Investec Chief Economist Philip Shaw. A second increase could potentially follow in February.
Earlier this month, the MPC voted 6-3 to maintain the Bank rate at 3.75%, with three members advocating for a quarter-point increase. Despite this vote, four members who supported keeping rates unchanged, including Governor Andrew Bailey, recognised that inflation risks had increased since the summer.
Concerns over the medium-term inflation outlook are influenced by the ongoing seven-month Iranian conflict, which has kept energy prices elevated. Brent crude oil has averaged around $95 a barrel since the conflict started, up from $69 in February, and is currently above $100. This could lead to higher energy costs for businesses and consumers, potentially triggering faster pay growth and a feedback loop of inflation.
The Bank's July forecast anticipated inflation returning to 2.0% by the first quarter of 2028, but this relies on energy prices falling. A prolonged period of inflation above the 2.0% target, which has been the case for the past five years apart from a brief three-month spell, could impact the MPC's credibility and push up longer-term borrowing costs.