Interest rate increase ‘likely’, warns Bank of England
Chris PriceThu, September 17, 2026 at 6:12 PM GMT+3 30 min read
Andrew Bailey has said that interest rates are likely to rise if the Middle East war rages on, warning inflation is now on course to hit 4pc.
The Bank of England opted to hold borrowing costs at 3.75pc on Thursday, the sixth time in a row it has left them unchanged.
However, the Governor said a "material" increase in energy prices since July would push up inflation to twice the Bank's 2pc target.
He warned the outlook for inflation "continues to be on the upside" and criticised the "seeming loss of urgency to find solutions" to the war in Iran.
Oil prices are back above $100 a barrel and analysts expect average gas and electricity bills to rise above £2,000 this winter as the conflict continues.
Mr Bailey said: "So far, higher global energy costs have had a limited effect on price and wage setting in the UK.
"But the longer this volatility persists, the bigger the impact it will have on inflation, and the more likely it is we will need to raise Bank Rate to ensure that inflation falls back to our 2pc target."
Investors expect the Bank to raise interest rates as soon as November, which has pushed average mortgage rates to their highest level in three years.
The average five-year fixed mortgage deal has risen to 5.87pc, according to Moneyfacts, which is the highest level since November 2023 and up from 4.95pc before the Iran war.
Thursday's rate hold leaves the Bank out of step with central banks around the world after the US Federal Reserve and European Central Bank voted to raise borrowing costs this month.
However, economists said there had been a change in tone from policymakers over the threat posed by energy prices and whether this would feed into the wider economy.
The Bank of England predicted that inflation would hit 4pc early next year, just as most workers are negotiating pay rises.
Paul Dales, chief UK economist at Capital Economics, said: "It seems as though a majority of the MPC is on the cusp of wanting to tighten policy."
In a warning on the impending pain facing households, Mr Bailey told the Chancellor that energy bills would rise by 24pc early next year under the Ofgem price cap.
This will push up annual average bills by £413 to £2,136, which the Governor blamed on the war in the Middle East.
The Governor is required to write a formal letter to the Chancellor every time inflation is more than a percentage point above its 2pc target.
Official data showed inflation rose to 3.1pc in August.
Mr Bailey said: "The energy price shock has been the most important factor driving recent short-term movements in inflation."
Despite expectations of higher rates, the FTSE 100 rose on Thursday at its steepest pace since July, climbing more than 1pc, as the Bank of England eased the pressure on the UK bond market.
Policymakers also confirmed a Telegraph report that the Bank will stop selling the long-dated bonds it amassed during the financial crisis and lockdown.
The Bank will continue actively selling £20bn of government bonds per year until the rest of the stockpile is wound down to zero in 2034.
The announcement triggered a sharp fall in the cost of borrowing for the Treasury, with the yield on 30-year UK gilts falling at the fastest pace since May.
Read the latest updates below.
04:12pm
Signing off...
Thanks for following our coverage of the Bank of England's interest rate decision, where it held rates at 3.75pc.
As we sign off, stocks and bonds are rallying over hopes that central banks are getting a grip on the global inflation crisis.
The FTSE 100 has risen 1.2pc after the US Federal Reserve rose interest rates for the first time in three years.
And while the Bank of England did not raise rates, its has strongly hinted that rate rises are on the way unless the Iran war comes to an end.
It also announced it would suspend sales of some of its long-dated bonds built up during the global financial crisis and the pandemic. This helped the cost of government borrowing fall, with the yield on 30-year gilts dropping at its steepest pace since May.
Stay up to speed with the latest here.
03:17pm
FTSE 100 rallies over hopes inflation is temporary
The FTSE 100 rose at its steepest pace since July after the Bank of England signalled inflation was not yet filtering through to other areas of the economy.
The UK's flagship stock index was up 1pc after interest rates were kept on hold, while the mid-cap FTSE 250 climbed 1.1pc, also its biggest jump in two months.
Analysts said markets were priced for a worst-possible outcome from the Bank of England, and while the minutes from its meeting suggested rates would rise, it was not as bad as feared.
John Wyn-Evans of wealth manager Rathbones, said: "The accompanying statements show that the committee still believes that the current inflation spike is temporary and will not lead to longer-term higher inflation."
The FTSE 100 was also boosted by an increase in gold prices after the US Federal Reserve raised rates, which pushed down the cost of government borrowing. Miners Glencore and Rio Tinto were among the biggest risers.
02:53pm
Two rates rises 'should be enough to quash inflation'
A group of economists is projecting that the Bank of England will raise rates in November and February after the change in tone from policymakers.
Capital Economics scrapped its forecast that policymakers would not increase borrowing costs this year after several members of the MPC suggested they would vote for higher rates if energy prices do not fall back.
Policymakers concluded there was an increased risk of so-called second round inflation effects seeping into the economy after the Bank forecast that inflation will increase to 4pc next year.
Chief UK economist Paul Dales said: "In other words, it seems as though a majority of the MPC is on the cusp of wanting to tighten policy just in case the burst of imported energy inflation transforms into a longer lasting rise in domestic inflation."
However, he added that weakness in the jobs market and wider economy would limit second-round inflation effects.
Mr Dales said: "That suggests to us that, as long as energy prices don't rise much further, one or two 25bps hikes is more likely than a series of hikes required to quash domestic inflation.
"What's more, if our forecast that CPI inflation will fall back to 2pc in late 2027 proves right, interest rates may be cut around the end of next year and perhaps to 3.5pc in 2028."
02:38pm
Wall Street rallies after US rate rise
The major US stock indexes opened higher after the Federal Reserve's first rate increase in three years.
The Dow Jones Industrial Average rose 420.6 points, or 0.8pc, at the open to 51,882.53 as chairman Kevin Warsh reassured investors of its commitment to reining in inflation.
The S&P 500 rose 79.6 points, or 1.1pc, at the open to 7,631.44, while the Nasdaq Composite rose 399.4 points, or 1.5pc, to 26,377.864.
02:01pm
Holding rates leaves Bank of England 'open to criticism'
Policymakers have left themselves open to accusations of "kicking the can further down the road" after leaving interest rates unchanged, a think tank said.
Julian Jessop, an economist at Institute of Economic Affairs, said there was an argument in favour of a "small increase" in rates now to avoid having to increase borrowing costs more sharply if inflation accelerates.
He said: "The MPC's decision to leave interest rates on hold today was understandable but it also opens up the Bank to criticism that it is simply kicking the can further down the road.
"Inflation has been above target for most of the last five years and is not expected to fall back to 2pc for at least another year.
"There are strong arguments against raising UK interest rates as far as the markets are currently expecting, including the weakness of the labour market and of broad money growth.
"But a small increase now might have helped to safeguard credibility and reduce the need for larger increases later."
01:46pm
Bank to raise rates 'reluctantly' in November
The Bank of England will raise rates "reluctantly" in November in order to convince markets it wants to bring down inflation, an economist said.
Andrew Wishart of Berenberg said the Bank would only raise rates once, compared to four times expected by markets.
He said: "Like us, the Bank of England thinks that the weakness of the labour market and tight financial conditions will probably keep a lid on domestically generated price pressures, particularly wages.
"If we are right, it is unlikely that the central bank will have to follow through with more than one of the three or four hikes investors currently price in.
"Assuming global energy supply eventually recovers, a decline in energy prices and release of the monetary brake from a repricing of market expectations should allow GDP growth to accelerate from 1.3pc in 2026 and 2027 to 1.8pc in 2028."
01:21pm
Healey's Budget 'could be decisive' in whether Bank raises rates
John Healey could make it easier for the Bank of England to resist a rate rise if he cuts borrowing in the Budget, a City investment bank said.
Peel Hunt said the Chancellor's speech on October 28 could be "decisive" ahead of the Bank's next meeting on November 5.
Kallum Pickering, the bank's chief economist, expects the Bank of England to keep rates on hold again in November, despite a shift in tone from policymakers.
He said: "If present energy market disruption continues or worsens, the logic of not waiting too long for second-round effects to emerge could trigger a hike — and with five of the six holders having set out the conditions for one, only two need to switch.
"If the Middle East conflict de-escalates, the case for holding strengthens.
"The October Budget could be decisive, and unsurprisingly the Committee said nothing about it.
"If the Government unveils measures that cut borrowing and constrict demand, that would strengthen the case for staying on hold."
01:01pm
UK borrowing costs fall as Bank halts gilt sales
The cost of long-term government borrowing fell at the sharpest pace since May after the Bank of England announced it would halt the sale of long-dated UK bonds.
The yield on 30-year UK gilts, as UK bonds are known, fell from 5.86pc to 5.76pc after the policymakers said the Bank would keep hold of £120bn of mostly longer issue gilts.
The move eases pressure on the bond market to find buyers for the huge amounts of government debt, which was pushing down prices and driving up yields – the return the Treasury offers to investors in its bonds in financial markets.
The 10-year gilt yield fell from 5.3pc to 5.23pc, while two-year yields declined from 4.76pc to 4.71pc.
The falling cost of borrowing eases the pressure on Chancellor John Healey as he seeks to restore £11bn of headroom in the public finances in next month's Budget.
Roger Lee, an analyst at Cavendish, said: "A beneficiary is the UK Government, given the sensitivity of gilt yields to refinancing cost and headroom to the fiscal rules."
Matthew Amis, investment director at Aberdeen Investments, added: "The reduction in long end sales will further decrease the pressure on long end gilts, a continuation of the trend started at the last Budget."
12:51pm
Bank will 'raise rates in November and February'
Economists said the Bank of England would raise interest rates in November and February after a sharp change in tone from policymakers.
Rob Wood, chief UK economist at Pantheon Macroeconomics, said the minutes of the Monetary Policy Committee (MPC) meeting showed Andrew Bailey and Clare Lombardelli were ready to vote for rate rises as soon as the next meeting in November.
A switch in votes from the pair would make a majority of the MPC in favour of a rate increase.
Mr Bailey, the Governor, acknowledged a prolonged Middle East war "increases" the risks of inflation feeding through from energy to other parts of the economy.
Meanwhile, deputy governor Lombardelli more notably shifted her position, after saying her vote to keep rates on hold in July had not been a close call.
She said: "The outlook for energy prices is uncertain and could change in the coming weeks, but the case for raising Bank Rate is building the longer the conflict continues without lasting resolution."
Mr Wood added: "The minutes today leave a November hike highly likely as long as energy prices remain elevated."
12:34pm
Bank of England to halt long-dated bond sales
The Bank of England confirmed a Telegraph report that it will stop selling the long-dated bonds it amassed during the financial crisis and lockdown.
The move eases pressure on the Chancellor after a global sell-off in debt markets since the start of the Iran war.
The Bank amassed a total of £895bn in gilts – as UK bonds are known – during the pandemic and financial crisis to prop up the economy.
However, Threadneedle Street is now selling some of these bonds back to the market at much lower prices.
This has resulted in billions of pounds of losses to taxpayers, who must foot the bill under a deal brokered by George Osborne.
Confirming a report in the Telegraph, Andrew Bailey announced that officials would hold £120bn of the longest-dated debt permanently in its portfolio.
Bonds with maturities above 20 and 30 years will be instead used to permanently back the Bank of England's banknotes.
The Bank will continue to actively sell £20bn of short and medium term debt every year until the stockpile is wound down to zero.
However, it has proposed doing so directly to the Debt Management Office (DMO), which issues bonds on behalf of the Treasury.
MPs across the political spectrum have called for a wider overhaul of the Bank's money printing programme, which is set to cost taxpayers an additional £94bn over the next five years.
The announcement means the Monetary Policy Committee (MPC) will no longer make an annual decision on how much to reduce its stockpile of bonds.
The Bank insisted that the final decision to sell directly to the DMO, which is likely to be viewed as controversial among many, laid with the Treasury.
John Healey said the decision would help to deliver "value for money" for the taxpayer, although the accounting treatment means it is unlikely to help his goal of balancing the books.
Deutsche Bank has calculated that stopping long dated sales will save taxpayers an average of £2.5bn a year until the end of the decade.
12:18pm
Pound falls after rates kept on hold
The value of the pound fell after the Bank of England left interest rates unchanged.
Sterling was down 0.2pc versus the dollar to $1.336 after traders scaled back bets on rate rises following the latest report from the Monetary Policy Committee.
The pound was down 0.3pc against the euro at €1.164 as money markets indicated the Bank of England was no longer expected to raise rates four times over the next year.
David Rees, head of global economics at Schroders, said: "The markets may be building a case for an autumn hike, particularly if other central banks are tightening, but monetary policy should be guided by the fundamentals of the UK economy rather than global optics.
"Domestically generated inflation is contained, wage growth is decelerating and unemployment near 5pc points to meaningful slack in the labour market. This is not an economy crying out for higher rates.
"The bigger risk lies with fiscal policy. October's Budget will be crucial. A spending splurge could revive domestic price pressures and bring forward rate hikes, but the strain already visible in gilt markets should make an inflationary fiscal expansion less likely. For now, the Bank has room to look through a temporary energy-led rise in headline inflation."
12:12pm
Healey promises 'buffer' in the Budget
John Healey has vowed to balance the books "with a buffer" at the Budget in a letter to the Governor of the Bank of England.
The Chancellor insisted "fiscal discipline is my priority" as he responded to a letter from Andrew Bailey, which the Governor was required to write after inflation rose more than a percentage point above the Bank's 2pc target.
Mr Healey added that measures announced to help the cost of living would be "fully funded" in the Budget.
Economists believe higher energy prices and interest rates have blown a £10bn hole in his buffer to balance the books. Restoring that is likely to involve steep tax rises.
12:09pm
Bank of England remains divided on raising rates
Three members members of the Monetary Policy Committee voted to raise interest rates to 4pc over the threat of inflation.
Megan Greene, Catherine Mann and Huw Pill all backed a rate rise in an exact repeat of the 6-3 vote split on the committee in August.
The Bank said the trio "noted that the escalation and duration of the Middle East conflict continued to raise energy and food prices".
"Global factors such as AI supply constraints and El Niño would provide inflationary pressure as well."
12:07pm
Energy bills to rise by a quarter, warns Bailey
Andrew Bailey warned that energy bills are likely to rise by a quarter this winter.
Mr Bailey blamed the war in the Middle East for most of the current price pressures.
The Governor is required to write a formal letter to the Chancellor every time inflation is more than a percentage point above its 2pc target.
Official data showed inflation rose to 3.1pc in August.
Mr Bailey said: "The energy price shock has been the most important factor driving recent short-term movements in inflation."
However, he said "significant further rises in crude oil prices" meant energy bills would rise by 24pc this winter to above £2,000.
He noted that Andy Burnham's VAT cut would help to offset these pressures by £45.
12:03pm
Bailey: Interest rate rises 'likely'
Andrew Bailey has warned that interest rate rises are "likely" if the Iran war continues to drive up inflation.
The Governor of the Bank of the England said: "Today, we've held Bank Rate at 3.75pc.
"So far higher global energy costs have had a limited effect on price and wage setting in the UK.
"But the longer this volatility persists, the bigger the impact it will have on inflation, and the more likely it is we will need to raise Bank Rate to ensure that inflation falls back to our 2pc target."
12:00pm
Interest rates left unchanged at 3.75pc
The Bank of England has kept interest rates unchanged despite rising inflation.
Policymakers opted by six votes to three to keep rates on hold at 3.75pc on Thursday in a vote that leaves them out of step with their international counterparts.
It is the sixth time in a row that the Bank has left rates unchanged, despite inflation increasing to 3.1pc in August.
However, Andrew Bailey, the Governor, warned that interest rate rises are "likely" if the Iran war continues to drive up inflation.
He said: "So far higher global energy costs have had a limited effect on price and wage setting in the UK.
"But the longer this volatility persists, the bigger the impact it will have on inflation, and the more likely it is we will need to raise Bank Rate to ensure that inflation falls back to our 2pc target."
Economists have suggested inflation will continue to rise as a result of the Iran war, which has pushed up the price of oil and gas. Some forecasts point to inflation hitting 4.5pc by January.
The rate hold leaves the Bank of England out of step with the US Federal Reserve and European Central Bank, which both voted to raise borrowing costs this month.
The Bank of Japan is also expected to lift its interest rate to a 31-year high on Friday.
11:56am
Pound rallies before rate decision
The pound has risen slightly in the run-up to the Bank of England rate announcement.
Sterling is now up 0.2pc on the day against the dollar to just over $1.34.
However, it remains down from its level before the US Federal Reserve announced its first rate rise in three years, which boosted the US currency.
The pound is flat against the euro at €1.168.
11:46am
FTSE rises in lead-up to rate announcement
A quick look at the stock markets before the Bank of England announces its next decision on interest rates shows the FTSE 100 is higher on the day.
The UK's flagship index has risen 0.2pc, with policymakers expected to leave rates on hold at 3.75pc.
Precious metal miners rose 1.4pc after the US Federal Reserve raised interest rates on Thursday. Gold prices rose following the Fed hike, lifting Pan African Resources and Endeavour Mining up by 4.5pc and 1pc, respectively.
Clothing retailer Next jumped as much as 3.3pc after raising its annual outlook for the fourth time this year, increasing its annual pre-tax profit guidance by £12m to £1.3bbn.
AstraZeneca rose around 1pc after unveiling an investment of nearly 200 million yuan (£22.3m) to upgrade its production and supply base in Wuxi, China.
The mid-cap FTSE 250 was up 0.4pc.
11:24am
Mortgage rates hit three-year high ahead of Bank of England meeting
Mortgage rates have hit their highest level in three years as pressure grows on the Bank of England to raise interest rates.
The average five-year fixed deal has risen to 5.87pc, according to Moneyfacts, which is its highest since November 2023.
Rates have risen after official figures on Wednesday showed inflation rose to 3.1pc in August.
It raises pressure on the Bank of England to increase interest rates from their current level of 3.75pc.
The typical two-year fixed mortgage rate has climbed to 5.83pc, its highest since May.
11:15am
Oil prices fall ahead of rate decision
Oil prices, one of the key drivers of inflation in Britain's economy, have fallen in the run-up to the Bank of England's interest rate decision.
Brent crude, the international benchmark, has declined by 1.5pc to just over $104 a barrel after the US Federal Reserve increased its own interest rates on Wednesday.
Lower oil prices ease pressure on the Bank of England to raise rates, as it signals inflationary pressures on the economy will weaken.
Bas van Geffen, an analyst at Rabobank, said: "Traders are growing more impatient in the face of the renewed energy price pressures.
"A sustained surge in energy prices would sharply raise the risk of a hike, if only to show that the Bank of England is on the ball."
10:54am
No UK rate rises this year, predicts Wall Street bank
A Wall Street bank has predicted that the Bank of England will keep rates on hold this year as inflation remains limited to energy prices.
Bank of America said weaker than expected services and food inflation in August would allow UK policymakers to keep rates on hold.
However, it acknowledged that the risk of a rate rise later this year or early next year had "become more pronounced, if the move in energy prices persist, which can imply inflation closer to 4pc and increase risks of second round effects".
Sonali Punhani, a UK economist at the bank, also disagreed with market expectations for four rate rises over the next year.
She said: "Even an insurance hike, if any, is unlikely to be the start of a sustained hiking cycle in our view. We view market pricing as excessive."
10:39am
Next boss urges Healey to rule out business tax raid at Budget
Higher interest rates risk putting fresh pressure on household budgets, something which the boss of Next is concerned about.
Lord Wolfson, who is the longest-serving FTSE 100 company chief executive, said he expected a "slow, steady decline" in customer spending later this year as inflation gathers pace, mortgage rates rise and the jobs market weakens.
Our retail editor Jonathan Prynn has the latest from him this morning, as the Next boss warns the Chancellor that further tax rises would only make the situation worse by stifling the growth.
10:21am
Borrowing costs creep higher ahead of rate decision
The cost of government borrowing has edged higher ahead of the rate announcement by the Bank of England.
The yield on 10-year UK gilts – considered a benchmark for what the Treasury pays to borrow money – rose from just under 5.3pc to 5.31pc.
UK borrowing costs fell sharply on Wednesday after official inflation figures, which suggested the effects of the Iran war had been limited to energy prices so far.
This suggests that the Bank of England might be able to look through a temporary inflation shock without the need to several rate rises.
Traders have slightly scaled back their bets rate rises over the next year, although money markets still indicate that four hikes are expected by July.
Roger Lee, an analyst at Cavendish, said: "After this week's data, it remains very difficult to justify the three to four rate rises currently being priced in by the market."
09:51am
Bank of England to put 'insurance hikes on the table'
The Bank of England will put "insurance hikes on the table" ahead of expected increases in inflation, Deutsche Bank said.
Sanjay Raja, the bank's chief UK economist, said the Bank would signal rate rises are on the way.
The path of inflation "is an uncomfortable one" after official figures showed prices rose by 3.1pc in August, he said.
This would be exacerbates by an expected 20pc rise in energy bills from January under the Ofgem price cap.
He said: "Cost of living pressures will intensify. Further rises to oil and heating oil prices will come in the next few months, as per current market pricing."
Deutsche Bank said there were many signs that inflation was so far limited to energy prices and not yet spreading into the wider economy.
Mr Raja added: "With oil and gas prices tearing ahead, risk management considerations lean one way: insurance hikes are very much in the table.
"Despite limited current evidence on second-round effects, the scale and duration of the energy shock is becoming much harder to ignore.
"A shift in framework from the MPC is looking increasingly likely. And we expect a modest amount of rate hikes to be very much on the table for the coming months."
09:30am
Holding rates would be 'dicing with danger'
The Bank of England would commit an act of "massive self harm" if it does not raise interest rates later today, Telegraph readers have warned.
Here is a selection of views from the comments section below, and you can join the debate here.
09:09am
'Good chance' interest rates will rise today, says former policymaker
A former rate setter at the Bank of England has said there is a "reasonable chance" that policymakers vote to lift borrowing costs today.
Dame DeAnne Julius, a member of the Monetary Policy Committee from 1997 to 2001, said she disagreed with bets on money markets that rates will be left on hold on Thursday before being raised to 4pc in November or December.
"I think there is a reasonable chance they will raise rates by 25 basis points to go up to 4pc," she told BBC Radio 4's Today programme.
"I think it is likely to be a split decision, unlike the Fed's decision which was unanimous, but the questions is whether any of those members who voted at the July meeting to hold rates, whether they will still continue to hold that way.
"The question is what has changed since the July meeting? The answer is two things: the situation in the Middle East has deteriorated and oil prices have been increasing.
"Secondly, here in the UK we have seen the latest CPI inflation number and it was up to 3.1pc in August.
"With those two changes since the last meeting, I think there is a good chance that the committee will vote for a rise."
08:51am
Pound at risk of 'downward repricing'
The pound could fall further in the months ahead if the Bank of England pushes back against suggestions that it will raise rates several times in the coming year.
Swiss private bank Union Bancaire Privée (UBP) warned that sterling was at risk of a "downward repricing" if traders scale back bets on the amount of times that policymakers wil raise rates.
Traders are betting that the Bank will raise rates four times over the next year, with at least once increase before the end of the year.
In a note to client, UBP said: "If the market reprices the Bank of England rate cycle lower, there is scope for the pound to fall against the dollar back to lower levels."
08:35am
Bank of Japan expected to raise rates to 31-year high
The Bank of Japan is also likely to ramp up pressure on the Bank of England to raise interest rates before the end of the year.
Japan's central bank is all but certain to raise interest rates to a 31-year high of 1.25pc on Friday as the Iran war sends energy costs soaring.
Investors will wait to hear Governor Kazuo Ueda's comments after the decision. Any signal that further rate rises are on the way could boost the yen.
This would cause a headache for the Bank of England, as it would risk further pressure on the pound, potentially fuelling more inflation as it would make imports more expensive.
08:07am
UK stocks rise ahead of rate decision
The FTSE 100 rose at the open after the US Federal Reserve's decision to raise rates for the first time in three years.
The UK's flagship stock index, where most companies report their earnings in dollars, climbed 0.4pc to 10,734.61.
The domestically focused FTSE 250 rose 0.3pc to 24,134.46 ahead of the Bank of England's interest rate decision.
07:55am
Rates expected to stay on hold despite rising inflation
The Bank of England is expected to keep interest rates at 3.75pc despite a jump in inflation last month.
Official figures on Wednesday showed inflation rose from 2.9pc in July to a five-month high of 3.1pc in August as the Iran war led to a surge in fuel costs for motorists.
Three members of the nine-person Monetary Policy Committee (MPC) are expected to vote for rates to be raised to 4pc.
Huw Pill, Megan Greene and Catherine Mann all voted to hike rates to 4pc at the MPC's last meeting.
Thomas Pugh, chief economist at RSM UK, said he expects inflation to peak at nearly 4pc early next year.
He said: "The MPC will hold this week, but inflation at 4pc is realistically too hot to ignore."
Economists for Pantheon Economics said there is a chance the MPC "toughens its language" at the next rates announcements "to open up the possibility of a November hike if energy prices keep ramping up".
They said: "A 4pc inflation peak would already be too hot to hold, but further energy price rises could take inflation even higher. The MPC needs to be ready."
07:43am
Fed rate rises puts sterling under pressure
The pound has come under pressure after the US Federal Reserve's decision to raise interest rates for the first time in three years.
The US dollar hit a seven-week high against major rival currencies as markets bet that the Fed will raise rates another three times over the next year.
Kevin Warsh, the Federal Reserve chairman, framed the increase as removing "a dose of accommodation" in financial conditions.
He added that this view on financial conditions was "widely shared across the committee".
Jim Reid, an analyst at Deutsche Bank, said: "In all, this left a clear sense of the Fed being at the likely start of a moderate tightening cycle rather than delivering a one-off hike."
Seema Shah, chief global strategist at Principal Asset Management, said: "The Fed has finally begun its hiking cycle, and the debate now shifts from whether rates will rise again to how many hikes lie ahead."
07:31am
Good morning
Thanks for joining me. The pound has come under pressure ahead of the Bank of England's next interest rate decision, where it is expected to keep rates on hold. Here is what you need to know.
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What happened overnight
Shares edged up in Asia as investors bet the Federal Reserve is finally getting to grips with inflation.
The dollar hit a seven-week high against its major peers after the Fed delivered its first rate hike in more than three years.
The move calmed a global bond sell-off leading up to the decision as markets ramped up wagers that the Fed may have to lift rates again.
That proved a headwind for commodities, with oil prices giving back ground.
The focus now shifts to the Bank of England, which is widely expected to leave interest rates steady.
European shares are set for a higher open, with the FTSE and the Cac 40 in France up 0.2pc up in premarket trading. Germany's Dax was up 0.3pc.
MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.3pc while Japan's Nikkei also gained 0.3pc. Chinese blue-chips slipped 0.2p and Hong Kong's Hang Seng fell 0.7pc.
US stocks mainly fell after the Federal Reserve lifted interest rates by a quarter of a percentage point. The Dow Jones Industrial Average fell 1.2pc while the S&P 500 slumped 0.4pc. The Nasdaq Composite was left mostly unchanged.
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