While today's inflation data, showing headline inflation at 3.1% in August, was close to market expectations, and soft labour market data suggests the Bank of England is unlikely to raise rates tomorrow, mortgage holders should not expect sustained relief. Governor Bailey may signal a low bar for future rate hikes, potentially as soon as November, according to William Nixon, a Senior Research Fellow at Policy Exchange.
This potential pivot reflects two risks not fully captured in current data: a renewed surge in global energy prices and the upcoming Budget. Global oil prices have risen by approximately 20% since the end of August, with Brent crude surpassing $100 a barrel. UK wholesale gas prices have doubled since July, reaching over £2 per therm.
A sustained increase in global gas and oil prices could lead to a 20% to 25% rise in UK households' combined energy bills in early 2027, potentially adding around 1 percentage point to headline inflation. This could keep overall inflation above 3% through 2027, exceeding the Bank's recent forecast of around 2%.
The Chancellor is scheduled to deliver his first Budget on 28 October. William Nixon suggests that if the government expands deficit spending without structural reforms to tax and welfare, it could increase pressure on the Bank of England to raise rates. Conversely, major reforms that reduce the deficit and boost the supply-side of the economy could make the Bank more willing to maintain current rates despite higher energy inflation.