The Bank of England is expected to overshadow John Healey’s maiden Budget with a “done deal” interest rate hike aimed at taming soaring inflation, but this threatens to limit economic growth.
Top City economists predict the central bank’s Monetary Policy Committee (MPC) will raise the base rate at its November meeting, just one week after the Autumn Budget.
The Bank has left rates unchanged at 3.75 per cent since its last 25 basis point cut at the end of 2025. But hawks on the committee have called for rates to increase in response to the energy crisis triggered by the ongoing US-Iran conflict.
Following a blowout inflation print on Wednesday, all barriers to a rate hike are expected to be removed.
Thomas Pugh, chief economist at RSM, said the inflation news, coming after stronger economic growth and a lower unemployment rate, “almost guarantees an interest rate hike next month”.
“With inflation likely to significantly exceed four per cent in the new year, a second rate hike looks likely in 2027,” he added.
Increased fuel prices drove September’s inflation spike, with diesel costs hitting their highest since July 2022. While the US-Iran war, which is stretching into its eighth month, has triggered a sharp rise in oil prices following the closure of the Strait of Hormuz, a crucial shipping route.
Cathal Kennedy, senior UK economist at RBC, said there was “limited evidence of broader inflationary pressures” outside of fuel pressures. But added this was “unlikely to stand in the way of the MPC raising rates”.
The Bank voted in a 6-3 split in favour of holding rates in September, with Megan Greene, Catherine Mann and Huw Pill the three dissenters.
Healey to contend with interest rates restricting growth
A rate hike would deal a major blow to Chancellor John Healey as he seeks to put the economy on a stable footing in the Budget.
“If the Chancellor didn’t have enough on his plate ahead of the budget, now he will likely have to contend with higher interest rates further constricting economic growth,” George Lagarias, chief economist at Forvis Mazars, said.
Any limits on growth would follow a better-than-expected period for UK GDP. In August, the economy grew 0.1 per cent, despite expectations of a contraction. The International Monetary Fund upgraded its growth forecast for the UK in 2026 to 1.3 per cent, from one per cent.
But it warned growth would slow to 1.2 per cent next year as long-term interest rates hit households as prices rise. The inflation spike is a major setback for Healey, due to it stemming from imported energy, which will raise household bills and state benefit costs without giving the same boost to domestic wages and tax revenues that home-grown inflation would.
Schroders’ head of global economics David Rees said the UK economy faced a “perfect storm of imported inflation pressures”.
He added the latest figures around growth and unemployment “means a November rate hike now looks like a done deal.”
In a speech in September, Healey said fiscal credibility was “indivisible from growth” and promised his central purpose as Chancellor would be to change Britain’s “weak” growth trajectory.
“With a week to go until John Healey’s eagerly anticipated first Budget, inflation figures provide a stark reminder of the UK’s difficult economic position,” Richard Carter, head of fixed interest research at Quilter Cheviot, said.
“Economic growth has remained resilient to date this year, but should rates rise, these are likely to bite in 2027 and hold the economy back as the Bank continues its inflationary battle.”
Responding to the inflation surge, Healey said: “We know that price rises from conflicts in the Middle East and Europe are hitting Britain and countries worldwide.”
He said he would use the Budget to maintain “fiscal discipline and drive for growth in every postcode, while giving businesses and families some breathing space.”