2nd November 2026
The Bank of England faces an uncomfortable decision this week. With energy prices pushing inflation higher, interest rates are expected to rise for the first time in more than three years. But will making borrowing more expensive actually solve the problem, or simply add to the financial pressures already facing households and businesses?.
The Bank of England is expected to increase interest rates on Thursday 5 November, taking its base rate from 3.75% to 4%. If that happens, it will be the first increase since August 2023 and a significant change in direction after a period during which borrowers had been hoping for further reductions.
The immediate reason is inflation. Consumer prices rose by 3.5% in the year to September, considerably above the Bank's 2% target. More importantly, the outlook has deteriorated because of the continuing conflict in the Middle East and the resulting disruption to international energy supplies.
Oil, gas and fuel prices have increased, adding to the cost of running homes, transporting goods and operating businesses. The Bank is concerned that these increases will spread through the economy, eventually becoming embedded in the prices charged by businesses and the wages demanded by workers.
However, there is a difficult question at the centre of this decision. Is increasing interest rates the right response when much of the inflationary pressure is coming from international energy markets rather than excessive spending within Britain?
Why energy prices are driving the problem
Britain is heavily exposed to changes in international energy markets. Although it produces oil and gas of its own, it remains a net importer of energy and is therefore vulnerable to international price increases.
When oil and gas become more expensive, the consequences extend well beyond the petrol station and household energy bill.
Transport companies pay more for diesel. Manufacturers face higher production costs. Farmers encounter increased costs for fuel, fertiliser and machinery. Food distributors and supermarkets must absorb higher transport and refrigeration expenses.
Eventually, many of these costs find their way into the prices paid by consumers.
There is also a direct effect on household finances. Families facing higher heating bills and petrol costs have less money available for other spending. Those who already struggle to balance their monthly budgets have little room to absorb another increase.
The problem is particularly concerning as households have not yet fully recovered from the previous cost-of-living crisis. Food, housing and other everyday expenses remain substantially higher than they were before the pandemic.
The Bank's concern is that an initial energy-price shock could develop into a longer period of inflation if businesses repeatedly increase prices and employees seek higher wages to compensate.
Economists call this a second-round effect.
Can higher interest rates actually control energy inflation?
This is where the debate becomes more complicated.
The Bank of England uses interest rates to influence spending throughout the economy. When borrowing becomes more expensive, households are less inclined to take out loans, businesses may postpone investment and people with mortgages have less disposable income.
At the same time, higher savings rates can encourage people to put money aside rather than spend it.
The intention is to reduce demand sufficiently to discourage businesses from increasing prices. In theory, this helps bring inflation down.
But there is an obvious limitation.
Increasing Bank Rate will not produce another barrel of oil, increase supplies of natural gas or reopen disrupted shipping routes. It will not reduce the international price of diesel or make electricity generation cheaper.
It can influence how much of those increased costs businesses are able to pass on to customers, but it cannot remove the original cause.
There is also a danger that the Bank could make an already difficult economic situation worse.
If households have less money to spend because of higher mortgage payments, energy bills and food prices, businesses may experience falling sales. Smaller companies could find themselves struggling with both higher operating costs and weaker demand.
That is not necessarily a recipe for economic growth.
The danger of repeating the mistakes of the past
The Bank of England has not forgotten the inflation experienced following Russia's invasion of Ukraine in 2022.
At that time, energy prices rose sharply, feeding through into food, transport and other essential goods. Inflation eventually reached double figures and interest rates had to be increased substantially.
The Bank was criticised for being too slow to recognise how persistent inflation would become.
There is an understandable reluctance to repeat that experience.
Governor Andrew Bailey and the Monetary Policy Committee must therefore decide whether the current energy shock is temporary or whether it is likely to become a longer-lasting inflation problem.
There are arguments on both sides.
If energy prices fall relatively quickly, increasing interest rates now could prove unnecessary and damage economic activity without providing much lasting benefit.
However, if prices remain high for an extended period and businesses begin passing higher costs through the economy, waiting too long could make inflation more difficult to control.
The Bank is particularly interested in whether higher energy costs are beginning to influence wages and prices more generally.
This is why Thursday's announcement will be important beyond the actual interest rate decision. The Bank's updated economic forecasts and the voting pattern among its nine Monetary Policy Committee members should provide clues about its thinking.
Households face another financial squeeze
For mortgage holders, the prospect of higher interest rates is unwelcome.
Anyone on a variable-rate mortgage could see repayments increase if lenders pass on the Bank Rate rise. Those coming to the end of fixed-rate deals may also discover that replacement mortgages are more expensive than expected.
More than 2.3 million UK households are due to come off fixed-rate mortgages during 2027, according to figures reported by the Guardian on 2 November.
The problem is not restricted to mortgages. Higher borrowing costs affect personal loans, credit facilities and businesses that depend on bank finance.
Renters may also be affected. Landlords facing higher mortgage and operating costs may seek to recover some of those expenses through increased rents, although the extent to which they can do so will depend on local housing demand and tenants' ability to pay.
There is a potential benefit for savers, who may receive better returns on deposits. However, banks do not always pass on interest rate increases in full, and the benefit to savers must be weighed against the wider effect of higher prices.
For older people living on fixed incomes, households with limited savings and families already struggling with housing costs, another period of rising expenses could be particularly difficult.
Businesses face a different kind of problem
For British businesses, the combination of higher energy prices, increased wages, taxes and borrowing costs creates a difficult operating environment.
A large company may have sufficient financial reserves to absorb some of these increases. A small independent business, however, may have much less flexibility.
A local hotel, café, shop, garage or building contractor cannot necessarily increase prices whenever its costs rise. Customers have their own financial limitations and may simply spend less.
Businesses considering investment in new equipment, premises or additional employees may also decide to postpone those plans if borrowing becomes more expensive.
This matters for Scotland and particularly for areas such as Caithness, where smaller businesses play an important part in the local economy.
Economic growth depends not only on large corporations and major infrastructure projects but also on thousands of smaller employers making decisions about whether to expand, recruit and invest.
If those businesses become increasingly cautious, the consequences can extend into employment, household incomes and local spending.
Britain's economic outlook is deteriorating
The latest economic forecasts from the Office for Budget Responsibility (OBR), published alongside the October 2026 Budget, provide further reason for concern.
The OBR expects inflation to approach 4% in early 2027, largely because of the direct and indirect effects of higher energy prices.
It has also reduced its forecast for economic growth in 2027 to around 1%, half a percentage point below its March projection.
The watchdog expects no growth in real earnings in 2027 and 2028, with a slight fall in real household disposable income per person in the near term.
These are important figures because they suggest that households could face another year in which the cost of living continues to rise while their purchasing power struggles to keep pace.
The OBR also makes clear that its forecasts are subject to considerable uncertainty, particularly because international energy prices have been volatile and had already moved significantly since some of the assumptions underpinning its calculations were made.
The prospect of higher interest rates adds another complication to an economy already facing weak growth.
Is there an alternative?
The Bank of England has a specific responsibility to maintain price stability, with an inflation target of 2%. It cannot simply ignore rising prices because the causes are difficult to control.
However, there is a legitimate debate about whether interest rates should carry so much of the responsibility for dealing with supply-side inflation.
When the problem originates in international energy markets, other measures may also be needed.
Improving domestic energy security, investing in electricity generation and storage, strengthening transport infrastructure and reducing unnecessary dependence on imported fuels could all help make Britain less vulnerable to future shocks.
There is also a question about how government support should be targeted when energy prices rise sharply. Helping households most exposed to increased bills may be more effective than measures that benefit everyone regardless of need.
None of these policies offers an immediate solution to an international energy crisis, but they address some of the underlying vulnerabilities that interest rate increases cannot resolve.
The decision on Thursday is only the beginning
The Bank of England is widely expected to raise interest rates to 4% this week. Financial markets have also been anticipating further increases during 2027, although there is disagreement among economists about how many will actually be necessary.
The Bank may want to make clear that it is prepared to act against inflation without committing itself to a prolonged series of increases.
That distinction matters enormously.
Britain needs to control inflation, but it also needs investment, business confidence, employment and economic growth. A policy that succeeds in reducing inflation but causes unnecessary damage to the productive economy would come at a considerable price.
There is no easy answer. Leaving interest rates unchanged could allow inflationary pressures to become more persistent, while increasing them risks placing additional financial burdens on people and businesses already struggling with higher costs.
The uncomfortable reality is that British households may find themselves paying twice for the same international energy crisis: first through higher fuel and heating bills, and then through the higher borrowing costs intended to prevent those price increases spreading throughout the economy.
The question for the Bank of England is whether that additional sacrifice will bring inflation under control without pushing an already fragile economy into a much deeper slowdown.