Bank warns UK inflation could reach 5% by mid-2027

Around 5%: that is where the Bank of England now expects UK inflation to reach by mid-2027, as higher energy prices spread through the economy. The warning came with Thursday’s decision to raise the key interest rate to 4%, the first increase since August 2023. The bank says inflation stood at 3.5% in September, well above its 2% target. ¹

That 5% forecast rests partly on sharply higher oil prices. Brent crude averaged $108 a barrel over the 15 UK working days ending October 27, 38% above the level used in the bank’s July report. The Monetary Policy Committee voted 8-1 to lift the rate by a quarter point; member Catherine Mann wanted a larger rise, to 4.25%. The bank expects inflation to ease later as the energy shock drops out of annual comparisons and higher rates hold down prices. ¹

The 4% rate is meant to stop today’s energy shock from causing lasting rises in prices and wages. But the decision comes as households face higher bills and businesses are under pressure. One account of the decision says UK firms have absorbed much of the energy-cost increase through lower profits. The Office for Budget Responsibility expects weaker growth and a lower inflation peak than the bank does. That disagreement matters: higher rates may curb price rises, but they also make borrowing more expensive and can weigh on spending and investment. ^2,7

The next rate decision is not settled. Governor Andrew Bailey said another increase could follow if the Middle East conflict continues. Committee member Alan Taylor called Thursday’s move a one-time insurance step, not the start of a series of rate rises. The bank says it will adjust rates as needed to bring inflation back to 2% over the medium term. Borrowers with tracker and variable-rate mortgages may face higher payments; fixed-rate borrowers are protected until their deals end. ^1,7