The Bank of England will probably need to raise interest rates further in 2027, following another anticipated increase in December, the central bank's chief economist said, pointing to sustained inflationary pressures connected to higher energy costs stemming from the Iran conflict.
Officials signalled that additional monetary tightening would likely be necessary to steer inflation back toward the 2% target. The chief economist warned that elevated energy prices risk feeding into wages and broader consumer prices, producing so-called second-round effects that could entrench inflation across the economy.
The central bank raised its benchmark interest rate by 25 basis points earlier this month to 4% - the first increase since August 2023. While describing that move as a meaningful adjustment, the chief economist said borrowing costs still appear to be below the level required to contain inflation.
Policymakers currently expect British inflation to near 5% by mid-2027, more than double the 2% objective, with the rise in energy costs associated with the Iran conflict contributing to persistent wage pressures. Against that backdrop, the chief economist judged the chances of a prompt resolution to the conflict and a rapid fall in energy prices to be extremely low, reinforcing support for another quarter-point rate increase in December.
Financial market pricing shows roughly 90 basis points of additional tightening anticipated by the end of 2027, a path that would take the benchmark rate close to 5%. The chief economist described those market expectations as reasonable and said investors were not overstating the likely scale of future increases.
He also acknowledged that the central bank should have acted earlier as inflationary pressures mounted. That delay, he warned, has narrowed the central bank's room to manoeuvre, reducing the possibility of using smaller, incremental adjustments and potentially necessitating a stronger response to restore price stability.
Market reactions in the financial sector were muted but mixed around the latest moves. Reported intraday changes included HSBA up 0.03%, BARC down 0.17%, LLOY up 0.33%, NWG up 0.47% and STAN down 0.63%.
Taken together, the comments underline expectations that monetary policy in Britain could remain restrictive through 2027 as policymakers contend with persistent inflation and ongoing uncertainty about global energy supplies.
Contextual note: The central facts above reflect the central bank's recent policy action, its inflation outlook through mid-2027, market-implied tightening through the end of that year, and the chief economist's assessment of both the risks from energy-driven second-round effects and the implications of delayed policy responses.