Economics 101: Hike or Hold: What’s Next for the MPC?

By Max Shepherd, Group Economist at Accord and Yorkshire Building Society 

Overview

The Bank of England’s Monetary Policy Committee (MPC) kept Bank Rate unchanged at 3.75% again in September, with a 6-3 vote split (the same as July), although three members preferred an immediate 0.25 percentage point increase.

While the decision itself was unchanged, the tone of the meeting minutes suggested a rate hike could be on the table as soon as November. The Committee said inflation risks were increasing and signalled it may need to act if higher energy prices start pushing up wages and prices more widely.

Despite the MPC leaving rates unchanged, the market continues to price in more hikes, having a big impact on mortgage rates. So, what’s currently influencing the MPC’s decision making, why are rates rising and what might come next?

What's changed?

The first issue is the level and duration of oil and gas prices. Energy costs have risen sharply in recent weeks, following developments in the Middle East. This directly affects petrol, transport and household energy bills, but also impacts things indirectly because energy is required for almost everything businesses produce and move. The longer prices remain elevated, the greater the chance that firms pass higher costs on to customers, and workers seek larger pay rises to protect their living standards.

Recent activity data is reasonably resilient. While growth is still modest, the economy appears to be coping with higher interest rates. If inflation spreads beyond energy and growth remains steady, it becomes harder to argue that rates are sufficiently high to control inflation. In that environment, a quarter-point increase in November, potentially followed by another in February, would look like a measured attempt to prevent inflation becoming more persistent rather than the start of a long cycle of increased rates.

There is, however, a credible case for leaving rates where they are. The Bank has said there is still little evidence that higher inflation is feeding through into broader wage and price setting. Wage growth has slowed, the labour market remains subdued and households and businesses already feel pressure from higher borrowing costs. Higher swap rates and gilt yields have done some of the MPC’s work for them by increasing borrowing costs without changing Bank Rate. If these conditions continue, the Committee may decide that holding fire on rate hikes is the best option.

The September meeting suggests the MPC are less willing to wait for definitive proof that higher energy costs are feeding through into wider inflation. Monetary policy works with a lag, so waiting too long could mean that inflation becomes entrenched. A modest rise could be used as an insurance policy: not because the Bank believes a wage-price spiral is already under way, but because the probability of one increases the longer energy prices remain high and keep inflation elevated.

So what would make a hike more likely? The clearest trigger would be energy prices remaining high, or rising again, before the November meeting. The case would strengthen further if businesses started raising prices, consumers expected inflation to stay higher for longer, or workers began asking for bigger pay rises to keep up with living costs. Stronger-than-expected economic activity would also reduce the MPC’s concern that a hike might put too much pressure on households or businesses.

A meaningful and sustained fall in oil and gas prices would be the strongest reason to keep rates on hold.
This could happen if tensions in the Middle East eased, energy supplies improved, or it became clear that the recent rise in prices was only temporary. The MPC would also be less likely to raise rates if the jobs market weakened further, consumer spending slowed, or business activity showed signs of cooling, as higher rates could then do more harm than good.

The critical distinction is between the first-round impact of energy and the second-round response of the domestic economy. The MPC cannot produce oil or resolve geopolitical conflict. It can only try to stop a temporary rise in the cost of energy causing  a lasting rise in wages, prices and inflation expectations. If higher energy costs pass through only briefly, a rate increase may be unnecessary. If they begin to change behaviour across the economy, the case for action becomes much stronger.

What does this mean for brokers?

For brokers, it’s worth remembering that fixed mortgage rates are driven more by expectations for future Bank Rate than by the current Bank rate. Lenders price fixed rate products using swap rates, which reflect the market’s view of the average path for interest rates over the relevant term. This is why mortgage rates can rise before the MPC changes Bank Rate, or fall even while Bank Rate remains unchanged. The recent volatility in mortgage pricing reflects changing expectations about energy, inflation and the timing of future MPC decisions.

The practical message for borrowers is therefore not to focus on a single MPC date. The rate available to a customer will depend on the path markets expect over the full fixed period, competition between lenders, product fees and the borrower’s specific circumstances. In a volatile market, brokers can add value by explaining why products are moving and by helping customers compare the certainty of fixing now with the risk of waiting for a potentially better rate that may never arrive.

Recent market pricing implies 4 quarter point rises in the next 12 months, hence the recent increase in mortgage rates across the market. The rapid rise in swap rates began mid-September, linked to negative developments in Saudi Arabia causing further rises in energy prices. However, based on the current narrative from the MPC,  this many hikes looks unlikely.

My own view is that the MPC has opened the door to a modest increase in rates if energy prices remain elevated, as early as November. Three members who voted to hold in September; Andrew Bailey, Sarah Breeden and Clare Lombardelli – have since given speeches signalling they are edging toward hiking rates. This would be enough to shift the vote in November to a 6-3 hike.  If it does move in November, a second increase in February is plausible, although anything beyond that would require clearer evidence that the shock is feeding into 2027 wages, pricing decisions and inflation expectations.

The bottom line is that the outlook can change quickly. Lower energy prices and continued weakness in the labour market would support keeping Bank Rate at 3.75%. Elevated energy prices, resilient growth and emerging inflation in the economy would point towards hikes. For now, the MPC is balancing those two possibilities. The next decision will be data-dependent, but the threshold for acting appears lower than it was only a few months ago.