Bank of England's Pill Signals Rate Rises Next Month and Into 2027

Huw Pill, the Bank of England's chief economist, told the Financial Times he is poised to vote for another quarter-point increase at next month's meeting and expects more hikes after that. The Bank nudged rates from 3.75% to 4% earlier this month, a move Pill called a significant step toward a better place for monetary policy — but, he said, we have further to go. His view, he told the paper, is that we will see evidence that motivates further rises.

The backdrop is an inflation rate the Bank expects to hit 5% in spring next year, driven by high oil and gas prices stemming from the Iran war. Pill expects public and private sector workers to demand substantial pay rises as a result, keeping inflation high for longer, and he rated the chances of the US-Israeli conflict with Iran ending and energy prices falling as very low. His bias, he said, is that he worries about the inflationary impact being magnified by second-round effects. In my view, we waited too long, he added.

He pushed back on the idea that the Bank is acting without evidence. While it has not yet seen wage increases or companies passing higher costs to consumers, Pill argued the absence of evidence was not evidence of absence, and that evidence will start showing up next year. Markets expect UK rates to climb to almost 5% in 2027 — a set of expectations Pill called not outrageous. He hinted he could back bigger increases, saying the ability to be modest in the scale of rate rises has diminished.

The stakes land squarely on households. An estimated 2.3 million homeowners will have to refinance next year, facing sharply higher mortgage payments. Spending is also likely to cool 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 climb by an average of almost 5%.

Pill's increasingly hawkish tone has led City analysts to treat a December rate rise as almost inevitable. But not everyone agrees the economy can take it. The UK grew 0.7% in the third quarter, with an annual growth rate surpassed only by the US among G7 nations, yet manufacturing and construction have contracted for much of the year and critics warn further borrowing cost increases will hit both harder.