Bank of England chief economist Huw Pill has signalled that the central bank will probably need to raise interest rates next month and again in early 2027 to fight rising inflation. Pill said the recent quarter-point rise to 4% was a significant step but not enough, adding that the ability to be modest in the scale of rate rises has diminished.
Huw Pill, the Bank of England's chief economist, told the Financial Times he expects evidence that will motivate further increases, and that the central bank will do what is necessary to bring inflation back to the 2% target.
“In my view, we waited too long,” he said, referring to the Bank's earlier rate decisions. He said he worried that the inflationary impact could be magnified by second-round effects, and expected public and private sector workers to demand substantial pay rises, which would keep inflation high for longer.
Pill expects inflation to rise to 5% in spring 2027, driven by high oil and gas prices stemming from the conflict involving Iran, and sees an end to that conflict as a “very low probability”. He signalled he was poised to vote for another quarter-point rise next month, and hinted he could vote for more substantial increases at the Bank's next meetings.
Financial markets currently expect UK interest rates to reach almost 5% in 2027. Pill described these expectations as "not outrageous", noting that "the ability to be modest [in the scale of rate rises] has diminished".
City analysts have interpreted Pill's comments as making a December rate rise all but certain. However, there is disagreement over the strength of the economy. Many are concerned that further increases in borrowing costs will hit manufacturing and construction, which has contracted for much of the year. Households are also likely to cut 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%.
Analysis
Why This Matters
- About 2.3 million homeowners will refinance mortgages next year, facing higher payments.
- The Bank's hawkish stance signals persistent inflation, partly driven by geopolitical factors beyond the UK's control.
- Further rate rises risk slowing economic growth, particularly in manufacturing and construction, and may reduce household spending.
Background
The Bank of England's base rate is currently 4% after a quarter-point increase in November 2026. Inflation is above the 2% target and is expected to peak at 5% in spring 2027, driven by high oil and gas prices linked to the Iran conflict. The UK economy grew 0.7% in the third quarter, outperforming most G7 nations except the US.
Key Perspectives
- Huw Pill, Bank of England chief economist: believes further rate rises are necessary, possibly larger, and that the Bank should have acted sooner.
- City analysts: interpret Pill's comments as making a December rate rise almost inevitable.
- Industry and economic analysts: warn that further rate rises will hurt manufacturing, construction, and household budgets.
What to Watch
- The Bank of England's monetary policy committee meeting in December 2026.
- Inflation data in early 2027, particularly the expected rise to 5% by spring.
- The impact on 2.3 million homeowners due to refinance their mortgages next year.
Checked
12 claims in this story checked against 1 source: 10 supported.
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- SupportedThe Bank of England’s chief economist says interest-rate rises are likely.Business | The Guardian: “The Bank of England will probably need to raise interest rates next month and again in early 2027 to combat rising inflation, its chief economist has said.”
- SupportedPill expects inflation to reach 5% in spring 2027, driven by rising energy prices.Business | The Guardian: “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”
- SupportedPill expects public and private sector workers to demand substantial pay rises, keeping inflation high for longer.Business | The Guardian: “Pill expects public and private sector workers to demand substantial pay rises, which would keep inflation high for a longer period.”
- SupportedPill said, “In my view, we waited too long.”Business | The Guardian: ““In my view, we waited too long.””
- SupportedPill said the Bank will do what is necessary to bring inflation back to its 2% target.Business | The Guardian: “adding that the central bank would “do what is necessary to get inflation back to 2% through time”.”
- SupportedPill said the recent quarter-point rise to 4% was a significant step, but not enough.Business | The Guardian: “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”.”
- SupportedPill said the ability to be modest in the scale of rate rises has diminished.Business | The Guardian: “because the “ability to be modest [in the scale of rate rises] has diminished”.”
- SupportedFinancial markets expect UK interest rates to reach almost 5% in 2027.Business | The Guardian: “Financial markets expect UK interest rates to rise to almost 5% in 2027.”
- Partly supportedCity analysts have interpreted Pill’s comments as making a December rate rise all but certain.Business | The Guardian: “City analysts have interpreted the increasingly hawkish comments of Pill and other MPC members as making an interest rate rise in December almost inevitable.”
- Partly supportedFurther borrowing-cost rises could hit manufacturing and construction, and construction has contracted for much of the year.Business | The Guardian: “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.”
- SupportedThe energy price cap is expected to rise to almost £2,000 for a typical home in the new year.Business | The Guardian: “the energy price cap is expected to rise to almost £2,000 for a typical home”
- SupportedCouncil tax bills are expected to increase by an average of almost 5%.Business | The Guardian: “council tax bills increase by an average of almost 5%.”