BOE Sounds Inflation Alarm as It Holds Interest Rates

The Bank of England predicted British inflation will top 4% early next year as it held interest rates unchanged on Thursday. The Monetary Policy Committee voted 6-3 to keep interest rates at 3.75%. Three members voted for a rise to 4%, in line with economists' median forecast.

Bank Governor Andrew Bailey warned that prolonged conflict in the Middle East may require tighter policy and that higher global energy costs will have a bigger impact on inflation, making it more likely to raise interest rates. The BoE said inflation risks had tilted further to the upside since publishing its last set of economic forecasts in July.

The Bank of England bumped up its estimate of quarterly economic growth for the third quarter to 0.4% from its previous 0.1% estimate, but warned that inflation could 'now reach slightly over 4% in early 2027'. The BoE strengthened its language surrounding the outlook for price pressure.

While most households and businesses will be focused on the shifting outlook for interest rates, some economists believe the Bank of England could hike rates at its next meeting in November. Analysts warn that rate hikes come at a difficult time for Prime Minister Andy Burnham and his finance minister John Healey as they try to strike a positive tone about Britain's economic outlook ahead of the budget on October 28.