The Bank of England’s next monetary policy decision is five weeks away, yet gilt markets are already behaving as if a November rate hike is more likely than a cut. That is the rational response to an energy shock that has pushed CPI inflation back above 3% while services prices refuse to cool.
We argued after September’s 6–3 hold that the committee’s hawks were not posturing. Catherine Mann’s October speech made the case plainly: nominal yields have risen, but much of the move reflects inflation risk premia rather than tighter real financial conditions. Waiting for markets to do the MPC’s job is not a strategy when pay growth still runs hot and corporate pricing surveys show deferred increases tied to utility bills.
Energy is not a one-quarter blip
Governor Andrew Bailey acknowledged in September that protracted Middle East conflict has made crude and refined products more volatile. Motor fuel and household utility costs feed directly into the CPI basket British households experience. The MPC’s concern is second-round effects: if firms rebuild margins lost to higher input costs, inflation could linger above target into 2027 even if wholesale energy retraces.
Politicians want lower borrowing costs ahead of a difficult Budget. We understand the temptation. But easing policy while energy risk remains elevated would repeat the communication errors that forced the emergency intervention of 2022. Credibility is earned by matching words to actions.
Fiscal policy cannot substitute
Downing Street’s pledges on pub rates and bus fares may help selected sectors, but they do not neutralise a terms-of-trade shock. Treasury offsets targeted at hospitality are not large enough to move the macro inflation series the MPC targets. If anything, poorly timed fiscal loosening could force the committee to hike more aggressively to keep expectations anchored.
Chancellor John Healey should use the 28 October Budget to publish credible medium-term paths for debt and investment, giving rate-setters confidence that demand will not be overstimulated. Transparency beats surprise.
Household impact
More than a million fixed-rate mortgages are scheduled to refinance before next spring. Each quarter-point increase in Bank Rate feeds into swap rates and, with a lag, into new fixed products. Renters face pass-through via buy-to-let finance costs. The social cost of higher rates is real; so is the social cost of entrenched inflation eroding wages.
Macro stability is not a abstract City concern—it determines whether real pay growth finally outpaces prices. The MPC’s mandate is price stability, not asset prices. We support holding that line.
Our view
Unless energy prices collapse and wage data soften markedly before the November meeting, the committee should hike Bank Rate to 4% and explain clearly that cuts are off the table until inflation returns sustainably to 2%. Half measures—holding at 3.75% while dissent grows—only inflate the premium investors demand to hold gilts. The cost of credibility is short-term pain; the cost of losing it is worse.