Interest rate rises likely in coming months, Bank of England economist says

Signalling a sharp rise in mortgage payments for an estimated 2.3 million homeowners who will have to refinance their loans next year, Pill said that while the decision to nudge interest rates from 3.75% to 4% earlier this month was a "significant step" towards getting monetary policy into a better place, we have further to go.

Economic Strength

The chief economist is one of a number of the Bank's policymakers who believe the UK economy has gained in strength over the last year, handing workers the power to bid up wages. Recent figures showed the economy grew by 0.7% in the third quarter, to give an annual rate of growth that was only surpassed by the US among the G7 group of wealthy countries.

Inflation Concerns

With inflation expected to rise to 5% in spring next year, driven by high oil and gas prices as a result of the Iran war, Pill expects public and private sector workers to demand substantial pay rises, which would keep inflation high for a longer period.

Market Expectations

Financial markets expect UK interest rates to rise to almost 5% in 2027. Pill said these expectations were "not outrageous", hinting that he could vote for more substantial increases in the cost of borrowing at the next meetings of the Bank's monetary policy committee (MPC) because the ability to be modest [in the scale of rate rises] has diminished.

City analysts have interpreted the increasingly hawkish comments of Pill and other MPC members as making an interest rate rise in December almost inevitable. But there is disagreement about the strength of the economy, with many concerned that further increases in the cost of borrowing will hit the manufacturing sector and the construction industry, which has contracted for much of the year.

Households are also likely to cut back on spending in the new year, when the energy price cap is expected to rise to almost £2,000 for a typical home and council tax bills increase by an average of almost 5%.