Bank of England Faces Pressure to Raise Rates to 5%

The National Institute of Economic and Social Research (NIESR) is urging the Bank of England to raise its key interest rate to approximately 5% to combat inflation, which is projected to peak at 4.4% in February 2027. This recommendation follows a recent Bank of England increase from 3.75% to 4%, a move triggered by energy price spikes resulting from the war between the United States and Iran. NIESR warns that a more aggressive hike is necessary to prevent second-round effects where workers seek higher wages, noting that a 5% rate would return inflation to the 2% target 18 months sooner than a 4.25% rate.

Bank of England Deputy Governor Clare Lombardelli indicated that further increases are likely in the near term due to prolonged energy shocks. Meanwhile, ING economists project a rate hike in February 2027 followed by cuts by November of that year, though they expect growth to slow due to restrictive monetary and fiscal policies.

NIESR also criticized Chancellor John Healey for postponing difficult tax and spending decisions in the autumn Budget. The think tank warned that unfunded commitments for defense, social care, and disability could cause the government to miss fiscal rules by approximately £30 billion, especially as rising debt interest costs have reduced Treasury headroom to £14.5 billion.

Separately, the Bank of Canada raised its policy interest rate to 2.5% on October 28. Governor Tiff Macklem warned that further hikes may be necessary if Middle East conflicts continue to drive energy costs, with inflation expected to remain above 3% through much of 2027.