26th August 2026
For anyone with a mortgage, business loan or other borrowing, the next decision by the Bank of England is becoming rather more interesting.
Bank Rate currently stands at 3.75%, and there had been an expectation that interest rates would gradually move lower as inflation came under control. But the latest rise in energy costs has complicated that picture. The question now is whether the Bank of England can continue cutting rates, or whether rising energy prices will force it to pause — and possibly even consider raising rates again.
The next Monetary Policy Committee decision is due on 17 September, and the economic circumstances surrounding it are becoming increasingly difficult.
The immediate problem is energy. Ofgem has confirmed that the household energy price cap will rise by 4% in October, taking the typical annual bill to £1,723. The increase reflects higher wholesale energy costs, with the continuing Middle East conflict adding considerable uncertainty to international energy markets.
At first sight, this might seem like a problem for households rather than the Bank of England. But energy prices have a much wider influence on inflation.
When electricity, gas and fuel become more expensive, households have less money available for other spending. Businesses face higher costs for heating, lighting, transport and production. Food producers and retailers face higher distribution costs. Manufacturers see their energy bills rise, while hospitality businesses face higher costs at exactly the time when customers are already watching their spending.
The danger for the Bank is not simply that inflation rises temporarily because of an energy shock. The bigger concern is what happens afterwards.
If businesses respond to higher energy bills by increasing their prices, workers may then seek higher wages to compensate for the increased cost of living. Businesses facing higher wages may increase their prices again. That can create a cycle in which an initial increase in energy prices begins to feed into the wider economy.
That is the sort of inflation the Bank of England cannot simply ignore.
There is already evidence that inflation expectations are becoming less comfortable. A recent Citi/YouGov survey found that people's expectations for inflation over the next year rose from 3.4% to 3.9% in August, while longer-term expectations also increased.
Expectations matter because people and businesses make decisions based on what they think prices will do in the future. If workers expect permanently higher inflation, they may demand higher wages. If businesses expect their costs to continue rising, they may increase prices sooner. If consumers expect prices to rise, they may bring purchases forward.
The Bank of England therefore has to watch not only what inflation is today but what people believe inflation will be tomorrow.
Yet there is a major problem with using interest rates to tackle an energy shock.
Higher interest rates cannot produce another barrel of oil or another cubic metre of natural gas.
If the underlying problem is a shortage of energy or higher international prices, increasing Bank Rate from 3.75% to 4% does not solve the supply problem. Instead, it makes borrowing more expensive for households and businesses.
This is why the Bank has to make a difficult judgement about whether the energy shock will be temporary or whether it is likely to become embedded in domestic inflation.
If energy prices rise sharply and then fall back, the Bank may decide that it is better to tolerate some temporary inflation rather than weaken an already fragile economy with higher interest rates.
But if energy prices remain high for months and begin feeding into wages, services and general price-setting behaviour, the argument for keeping rates higher becomes considerably stronger.
For mortgage borrowers, this creates another complication.
A rise in Bank Rate would not immediately increase everyone's mortgage payment. People on fixed-rate mortgages would generally remain protected until their fixed period ends. But borrowers on tracker or variable-rate mortgages could see an immediate effect, while people coming to the end of fixed deals could face higher refinancing costs.
There is also an important point that is sometimes missed in discussions about Bank Rate.
Mortgage rates do not move solely when the Bank of England changes Bank Rate. Fixed mortgage rates are strongly influenced by financial-market expectations and swap rates. If markets begin to believe that the Bank will have to raise rates, mortgage rates can rise before the Bank actually makes a move.
In other words, borrowers do not necessarily have to wait for a 4% Bank Rate before feeling the effect of a change in expectations.
This could produce a particularly uncomfortable situation for households.
Energy bills are rising.
Food and other household costs remain under pressure.
And if mortgage rates rise at the same time, households renewing fixed-rate deals could find themselves facing a double squeeze.
The same problem exists for businesses.
A small business already struggling with higher electricity, gas, transport and wage costs could also face more expensive borrowing. For a company operating on a narrow profit margin, an additional increase in financing costs can be enough to turn a difficult year into an unviable one.
This is why the September meeting has become a genuinely important one.
A few months ago, the argument appeared relatively straightforward: inflation was expected to ease and interest rates could gradually come down.
Now the Bank is caught between two opposing pressures.
On one side is the need to avoid keeping interest rates unnecessarily high in an economy that is already under pressure. Higher rates discourage investment, increase mortgage costs and make it more difficult for businesses to borrow.
On the other side is the danger that another energy shock will push inflation higher and cause inflation expectations to become entrenched.
The Bank could therefore find itself in the uncomfortable position of having to keep rates at 3.75% for longer than previously expected.
A rise to 4% is certainly possible if the forthcoming inflation and wage figures deteriorate sufficiently, although it would be premature to assume that this is now inevitable.
A hold at 3.75% may actually be the most sensible course if the Bank believes that the energy shock will eventually unwind and that underlying inflation is continuing to moderate.
What looks increasingly difficult is an automatic assumption that the next move must be another cut.
The energy market has changed that calculation.
There is also a wider economic irony here. Government measures can attempt to reduce the immediate impact of higher energy bills on households, but if the underlying energy shock pushes inflation higher, the Bank of England may respond by keeping interest rates higher for longer.
Relief on one side of the household budget can therefore be offset by pressure on another.
For someone renewing a mortgage, that could mean higher energy bills arriving at the same time as a more expensive mortgage. For a small business, it could mean higher energy costs arriving alongside higher wages, weaker consumer demand and more expensive finance.
That is why the next few weeks matter.
The August inflation figures, wage growth, services inflation and the direction of international energy prices will all help determine whether the Bank of England believes the latest energy shock is temporary or becoming a more persistent inflation problem.
At 3.75%, Bank Rate is already a long way below the levels seen during the worst of the recent inflation crisis. But the direction of travel is no longer as obvious as it appeared only a short time ago.
The big question for September is therefore not simply "Will the Bank cut interest rates?"
It is whether the energy shock has become serious enough to make the Bank fear that cutting rates now could allow inflation to become entrenched — and whether holding rates at 3.75% is enough to prevent that happening.
For households and businesses already struggling with energy costs, that is a question with very real financial consequences.