8th November 2026
The Bank of England's decision to increase interest rates in November has important implications for households, businesses, government finances and local authorities. It may also signal the beginning of another period in which the cost of borrowing remains higher than many people had expected.
On 5 November, the Bank's Monetary Policy Committee voted by eight votes to one to increase Bank Rate from 3.75% to 4%. One member wanted an even larger increase to 4.25%.
The reason is largely connected to the continuing conflict in the Middle East and its effect on global energy prices. UK inflation reached 3.5% in September and the Bank now expects it to approach 5% by the middle of 2027.
However, the announcement contains a more important warning. The Bank's economic outlook suggests that further interest rate increases may be necessary if inflationary pressures continue.
Financial markets are already pricing in a Bank Rate approaching 4.9% towards the end of 2027. This is a market-based measure rather than a definite prediction, but it illustrates how expectations have changed.
The Bank is concerned that higher energy costs will eventually feed through into transport, food production, manufacturing and services. Businesses may initially absorb some of these increases, but eventually they may have to pass them on to customers.
There is also the danger of second-round inflation, where workers seek higher wages to compensate for rising living costs and employers respond by increasing prices again.
The Bank wants to prevent this process becoming embedded in the economy.
What does this mean for households?
Mortgage borrowers are among those most exposed to higher interest rates.
People coming to the end of fixed-rate mortgage agreements may find that their replacement mortgage is more expensive than anticipated. Those with tracker mortgages or variable-rate borrowing could see repayments increase more quickly.
The effect can be substantial. A household with a large mortgage may find that even a relatively modest increase absorbs hundreds of pounds a year that would otherwise have been available for everyday spending.
Other borrowing can also become more expensive. Personal loans, credit cards, overdrafts and car finance may all add to the pressure.
Savers could benefit from better returns as banks and building societies adjust their interest rates. However, with inflation potentially approaching 5%, an account paying 4% would still produce a negative real return before tax.
The important consideration for households is that the cost-of-living squeeze may not disappear simply because some earlier inflationary pressures have eased.
Businesses face another challenge
Businesses are also facing a difficult combination of higher operating costs and more expensive borrowing.
Manufacturers, transport companies, agricultural businesses, food producers and retailers are particularly exposed to rising energy and fuel prices.
Higher interest rates can make investment in equipment, premises, vehicles and expansion more expensive. Smaller businesses may find it particularly difficult to absorb additional costs.
There is also a risk that consumers respond to higher household expenses by cutting discretionary spending.
Businesses could therefore experience higher costs at the same time as customers become less willing or able to spend.
That combination can lead to reduced investment, recruitment freezes and, in some cases, business closures.
The implications for government finances
The Government also faces a growing financial challenge.
Britain has a substantial national debt and must continually refinance maturing borrowing. Higher government bond yields can increase the cost of issuing new debt and refinancing existing commitments.
The Office for Budget Responsibility has already highlighted the importance of interest rate assumptions in its October 2026 Economic and Fiscal Outlook.
Higher debt interest payments leave less money available for public services, infrastructure and other government priorities.
This creates an uncomfortable position for the Treasury. It may have to find additional money to service borrowing just as households and businesses are struggling with higher costs.
Local councils face a less obvious borrowing problem
There is another area where higher interest rates could have significant consequences: local government.
Councils borrow substantial sums to finance schools, housing, roads, leisure facilities and other infrastructure. These investments can provide benefits for decades, but the borrowing used to finance them creates long-term financial commitments.
Scotland's local authorities had total debt of £25.3 billion at 31 March 2025, according to the Scottish Government's latest audited finance statistics.
That represented an increase of 10.2% in a single year. Total local authority debt had increased by 28.4% over five years.
The average debt was equivalent to approximately £4,560 per person across Scotland.
This is important because the cost of servicing borrowing has to be met from council resources, alongside the cost of providing education, social care, roads, waste collection and other essential services.
Audit Scotland has already warned that Scottish councils face a collective budget gap approaching £1 billion by 2027. It also reports that borrowing is increasing as councils attempt to maintain investment while capital funding comes under pressure.
Higher borrowing costs could make that situation more difficult.
Highland Council deserves particular attention
The position of Highland Council is especially interesting.
Highland has substantial infrastructure requirements because of its geographical size, dispersed communities and the costs of providing services across a large rural area.
It also has significant borrowing commitments.
According to its 2024/25 audited accounts, total short and long-term borrowing reached £1,308.7 million. That compares with £972.5 million in 2020/21.
In other words, borrowing increased by more than £336 million over four years.
There is an important distinction when comparing Scottish councils. Highland does not have the highest total debt per head of population. West Dunbartonshire holds that position.
However, research published by the Scottish Parliament in August 2026 identified Highland as having the highest annual General Fund borrowing-financing costs as a proportion of its available revenue among Scottish councils.
This is arguably an even more important measure when considering the effect of rising interest rates.
Highland's financing costs represented approximately 8% of its net revenue funding in 2024/25, with an increase to 8.4% forecast for 2025/26.
That means a significant proportion of the council's available revenue is already committed to financing its capital investment and borrowing.
The council is also planning a substantial programme of investment through its Highland Investment Plan, involving approximately £2.1 billion over 20 years.
The programme covers schools, roads, housing, community facilities and other infrastructure. Much of this investment is important for maintaining services and supporting communities across the Highlands.
However, it also creates a long-term financing commitment.
The council has previously acknowledged that changes in interest rate assumptions could affect how much capital investment it can afford.
Why Bank of England rates do not tell the whole story for councils
There is an important technical distinction here.
Most council borrowing is not directly linked to the Bank of England's Bank Rate.
Highland Council uses the Public Works Loan Board (PWLB) as a major source of borrowing. PWLB rates are linked more closely to government bond yields and wider financial market conditions.
Consequently, council borrowing costs can remain high even if the Bank of England eventually starts reducing its own interest rate.
There is also some protection because much existing council borrowing is arranged at fixed interest rates.
A rise in Bank Rate does not immediately increase the interest payable on every pound already borrowed.
The main exposure comes from new borrowing and loans that mature and need to be refinanced. Over time, however, higher borrowing costs can gradually work their way into council budgets.
This is particularly relevant for Highland because its investment programme will require financing over many years.
Construction inflation creates another problem. If schools, roads or other projects become more expensive to build, the council may need to find additional money, reduce the scope of projects or borrow more.
Borrowing more to meet higher construction costs can subsequently increase the cost of financing those projects.
Could this mean cuts to council services?
There is no automatic connection between higher interest rates and immediate cuts to services.
Councils can manage borrowing through long-term financial planning, fixed-rate loans, capital reserves and adjustments to investment programmes.
However, the underlying pressure is important.
Every additional pound committed to financing borrowing is a pound that cannot also be spent on social care, education, road maintenance or other day-to-day services.
Highland is already dealing with substantial financial pressures, including rising staffing costs, demand for social care, school requirements and the costs of maintaining infrastructure across a huge geographical area.
If borrowing becomes more expensive while government funding fails to keep pace with inflation, difficult decisions become harder to avoid.
The question is not whether Highland should invest in its infrastructure. Many of the projects are necessary. The question is whether the investment programme remains affordable under different interest rate and inflation assumptions.
The council and its elected members will need to keep a particularly close eye on this.
Could Britain be heading towards recession?
The Bank of England is attempting to control inflation without causing unnecessary damage to economic activity.
Higher interest rates reduce borrowing and spending, but they can also discourage business investment and weaken consumer confidence.
The Bank expects economic growth to slow and unemployment to edge upwards.
There are two possible directions for the economy.
If energy prices remain high and inflation becomes embedded, the Bank may have to increase interest rates further.
Alternatively, if households and businesses become unable to absorb higher costs, spending could fall sharply. That would weaken demand and potentially reduce inflation, but at the expense of economic growth and employment.
Neither outcome is particularly attractive.
Preparing for a period of uncertainty
The Bank's November decision should be a reminder that households, businesses and public authorities cannot assume that borrowing costs will soon return to the very low levels experienced during much of the previous decade.
Mortgage borrowers should review their arrangements, people with expensive debts should consider how to reduce them, and savers should look carefully at the real returns available.
Businesses need to examine cash flow, borrowing commitments and their ability to withstand weaker demand.
Councils, particularly those with substantial borrowing programmes, need to test their long-term investment plans against higher financing costs.
For Highland Council, the issue deserves particular scrutiny because its existing borrowing commitments and the scale of its planned investment programme leave relatively little room for complacency.
The Bank of England cannot control international energy prices, but it can influence the cost of borrowing in an attempt to prevent inflation becoming entrenched.
The difficulty is that the consequences extend well beyond mortgage holders and businesses. They reach into government finances and local authority budgets too.
Britain may be entering another prolonged period of financial pressure. The sensible response is not to assume the worst, but to recognise that the economic conditions many people had hoped would return may be some distance away.