The Bank of England is expected to raise interest rates in December and potentially into early 2027, according to chief economist Huw Pill, as the central bank continues efforts to bring inflation back to its 2% target.
Speaking to the Financial Times, Pill indicated that the recent increase from 3.75% to 4% earlier this month was a “significant step” but added “we have further to go”. The Bank’s monetary policy committee is scheduled to make its next rates decision on 17 December.
Impact on property market
The signalled rate increases are expected to result in higher mortgage payments for approximately 2.3 million homeowners who will need to refinance their loans next year. The property market has already experienced pressure from rising borrowing costs, with specialist lenders providing bridging finance to help borrowers navigate the changing rate environment.
Financial markets currently expect UK interest rates to reach almost 5% by 2027. Pill described these expectations as “not outrageous”, suggesting the possibility of more substantial increases at upcoming monetary policy committee meetings.
Inflation concerns
Inflation is projected to rise to 5% in spring 2027, driven by elevated oil and gas prices resulting from the Iran conflict. Pill expressed concern that public and private sector workers would demand substantial pay rises in response, potentially keeping inflation elevated for an extended period.
“My bias, for what it’s worth, is that I worry about the inflationary impact being magnified by second-round effects,” Pill said, adding that he believed the central bank should have acted sooner. “In my view, we waited too long.”
Recent economic data showed the UK economy grew by 0.7% in the third quarter, achieving an annual growth rate second only to the US among G7 nations. This stronger economic performance has contributed to policymakers’ view that workers have increased bargaining power for wage negotiations.
Economic headwinds
Despite the hawkish stance from Pill and other monetary policy committee members, concerns remain about the impact of further rate increases on specific sectors. The construction industry has contracted for much of the year, whilst commercial property refinancing has become increasingly time-sensitive as borrowing costs rise.
Households face additional financial pressure in the new year, with the energy price cap expected to increase to nearly £2,000 for a typical home and council tax bills rising by an average of almost 5%.
City analysts have interpreted the increasingly hawkish comments from monetary policy committee members as making a December rate rise almost certain, though disagreement persists about the underlying strength of the economy and the appropriate pace of monetary tightening.
