6th October 2026
For much of the past year, the direction of travel seemed reasonably clear.
Interest rates were expected to continue falling as inflation came under control. Borrowers could look forward to gradually cheaper mortgages, businesses could begin planning with a little more confidence and savers would have to accept that the unusually attractive rates of recent years were coming to an end.
Then came the energy shock.
The Bank of England has now left Bank Rate at 3.75%, but its message has become considerably less comfortable. The Bank says energy prices have risen further because of the conflict in the Middle East and that inflation, currently 3.1%, is likely to rise further. More importantly, Governor Andrew Bailey has warned that the longer energy prices remain high, the greater the risk that inflation becomes persistent.
The Bank's next interest-rate decision is due on 5 November.
Suddenly, the possibility of another increase is being discussed seriously.
The problem is that the Bank cannot produce more oil
This is where the situation becomes rather strange.
If the price of oil rises because supplies are disrupted, increasing the Bank of England's interest rate does not create another barrel of oil.
It does not make diesel cheaper.
It does not reduce the price of heating oil.
It does not lower the wholesale price of gas.
It does not make transporting goods across Britain cheaper.
Yet the Bank may still have to raise interest rates because of the consequences of those higher energy prices.
The reason is what economists call second-round effects.
An energy shock can initially push up petrol, diesel, heating and electricity costs. Businesses then face higher costs for transport, production and distribution. Some increase their prices. Workers may subsequently seek higher wages to compensate for the increased cost of living. Businesses then face another increase in costs and prices.
The original oil-price increase can therefore work its way through the economy.
That is what the Bank is trying to prevent.
The Bank's Clare Lombardelli has described the key question as whether the energy shock begins to produce persistent increases in wages and prices across the wider economy. The longer energy prices remain high, the greater that risk becomes.
But there is another side to the argument
Not everyone at the Bank believes a rate increase is yet justified.
Alan Taylor, one of the members who voted to keep rates at 3.75% in September, said recently that the case for an increase was not yet compelling. He accepted that energy prices could push headline inflation considerably higher but said there was still limited evidence that the shock was spreading into persistent domestic inflation.
That distinction is important.
An inflation rate pushed higher by petrol and energy is not necessarily the same thing as an economy in which wages and prices are continually chasing each other upwards.
Indeed, the latest available ONS figures show how strongly energy and motor fuel are already affecting the headline number.
In August, UK CPI inflation was 3.1%. Motor fuel prices were 23% higher than a year earlier, while diesel averaged 181.8p a litre. Electricity, gas and other household fuels were also rising, with that category showing 6% annual inflation.
That is already a substantial hit to household budgets.
And it is precisely why the next few months could be uncomfortable for the Bank.
A nasty choice
The Bank effectively faces two problems.
If it raises interest rates, it risks putting additional pressure on mortgage borrowers, businesses and an economy that is hardly racing ahead.
If it does nothing while energy prices remain high, it risks allowing inflation to become embedded in the wider economy.
Neither option is particularly attractive.
And there is an awkward irony here.
The people most affected by higher energy prices are often the same people who would be hit hardest by higher borrowing costs.
A household could therefore experience a double squeeze.
First, petrol, heating and electricity become more expensive.
Then, if the household has a mortgage that needs refinancing, the Bank's response to inflation could make the mortgage more expensive as well.
What about mortgage borrowers?
This is where the situation becomes particularly important.
For people who have been waiting for mortgage rates to continue falling, the energy shock introduces a significant uncertainty.
It does not necessarily mean that mortgage rates are about to return to the levels seen during the worst of the recent inflation crisis.
But it does mean that the assumption that every year will automatically bring lower rates is no longer safe.
The Bank's current rate is 3.75%, and its next decision is on 5 November. The September meeting itself was close enough to reveal a divided committee: six members voted to hold rates while three wanted an immediate increase to 4%.
That is hardly the picture of a central bank confidently preparing to cut rates again.
It is a central bank watching the energy market and asking whether a temporary shock is becoming a longer-term inflation problem.
The Budget makes the timing even more interesting
There is another important date in between.
The UK Budget is due on 28 October, only a week before the Bank's November decision.
That means the Bank will have to consider the Budget alongside the latest information on inflation, wages, energy prices and economic activity.
If the Budget stimulates demand significantly, that could add another consideration for the Bank.
If it is fiscally restrictive, the picture could be different.
Either way, the November meeting could be considerably more interesting than many borrowers had expected.
Britain has been here before
There is an important lesson from the inflation crisis of recent years.
Energy shocks can be surprisingly persistent.
But there is also a danger in assuming that every increase in oil or gas prices will automatically produce a repeat of 2022.
Alan Taylor has pointed out that the current situation is different from 2022 in important respects. He says there is currently less evidence of the kind of second-round inflation effects that followed the post-pandemic recovery and the Russian invasion of Ukraine.
That is why the Bank is watching the evidence rather than simply responding to the headline oil price.
The question is not merely:
“How expensive is oil?”
It is:
“How long will it remain expensive, and how much of that increase is spreading through the rest of the economy?”
And this is where ordinary households get caught
For someone in Caithness, the economic theory can seem rather remote.
The reality is much simpler.
A higher oil price can mean a more expensive journey to work.
It can mean more expensive diesel for farmers and hauliers.
It can increase the cost of getting goods to Wick and Thurso.
It can raise the price of heating oil.
It can increase the cost of running machinery and transporting materials.
And if inflation remains high enough for the Bank to raise rates, it can eventually affect the cost of borrowing too.
The energy shock can therefore travel a surprisingly long way from an oil field or shipping route before eventually appearing in the household budget.
The great uncertainty
The Bank of England's own message is actually quite clear.
It is not saying that a rate increase is inevitable.
It is saying that the longer the energy shock lasts, the more likely a rate increase becomes.
That distinction matters.
If energy prices fall back relatively quickly, the Bank may be able to look through much of the temporary increase in headline inflation.
If energy prices remain elevated for months and businesses begin passing those costs into prices and wages, the Bank could decide that doing nothing is becoming the greater risk.
So the direction of travel has become considerably less certain.
The era when borrowers could simply assume that the next Bank of England announcement would bring another step down in interest rates may have ended, at least temporarily.
And that creates a rather uncomfortable possibility.
Britain could be facing higher energy prices and higher interest rates at the same time.
For households already struggling with the cost of living, that is a combination worth watching very closely.
The irony is that neither the Bank of England nor the British Government can simply switch off the underlying energy problem.
They can try to cushion its effects.
They can try to prevent it spreading through the economy.
But ultimately, if the energy shock continues, somebody has to pay the bill.
And increasingly, that somebody appears to be the household.
The question for November is whether the Bank believes the energy shock is temporary enough to tolerate, or persistent enough to fight with higher interest rates.