Next move in interest rates could be UP to tackle stubbornly high inflation, warn experts

Borrowers have been warned that the next move in interest rates could be up to bring rising prices back under control.

Official figures on Wednesday showed inflation remained stubbornly high at 3.8 per cent in September with petrol prices and air fares putting pressure on family finances.

While this was lower than the 4 per cent feared by analysts, UK inflation is the highest in the G7 and nearly twice the 2 per cent target. It has not been worse since January 2024.

A leading City economist warned ‘high inflation is at risk of becoming entrenched’ – meaning the next move in interest rates could be up rather than down.

That would be a hammer blow to millions of households hoping for cheaper mortgages, possibly in time for Christmas.

Bank of England Governor Andrew Bailey is grappling with the highest inflation rate in the G7

It would also prove painful for businesses struggling to stay afloat in the face of high borrowing costs, rising taxes, a sharp increase in the minimum wage and a plethora of red tape.

Danni Hewson, head of financial analysis at AJ Bell, said: ‘Inflation has proved incredibly sticky in the UK compared to other G7 countries. 3.8 per cent is still uncomfortably high after the past few years.’

The Bank of England has cut rates five times since August last year, lowering them from 5.25 per cent to 4 per cent, having seen inflation drop from its 11.1 per cent peak in October 2022.

But after falling as low as 1.7 per cent before Rachel Reeves’ first Budget, inflation has since been rising again, meaning progress on rate cuts has been slow.

According to bets on financial markets, there is a one-in-three chance the Bank’s monetary policy committee (MPC) will cut rates next month with official borrowing costs expected to hit 3.5 per cent by the end of next year.

But George Brown, senior economist at Schroders, said: ‘Inflation near 4 per cent should serve as a wake-up call for markets, which continue to price in two more rate cuts.

‘High inflation is at risk of becoming entrenched in the UK, due to a combination of disappointing productivity and sticky wage growth.

‘We expect the Bank of England will keep interest rates on hold until the end of 2026 and we wouldn’t rule out its next rate move being upward.’

His warning was echoed by Nigel Green, chief executive of financial adviser deVere Group.

‘The latest inflation data should set alarm bells ringing,‘ he said.

‘These are not figures that give policymakers breathing space. They’re a warning that inflationary pressures are proving far more resistant than hoped.

‘Investors still appear to be betting on rate cuts in the coming months, which we believe is misplaced.

‘The Bank of England cannot credibly loosen policy while inflation sits almost double its 2 per cent target.

‘The reality is that rates are likely to remain at current levels until well into 2026. There’s even a non-trivial chance that the next move will be upward rather than down.’

High inflation is also proving a headache for Rachel Reeves as it pushes up the cost of servicing the near-£3trillon national debt.

The Chancellor is expected to unleash another round of tax hikes in the Budget next month in a desperate bid to fund her lavish spending plans.

Others are more optimistic about the outlook for interest rates, however.

George Buckley, an economist at Nomura, said the lower than expected inflation reading ‘keeps the next MPC meeting live’.

He has pencilled in a 0.25 percentage point cut on November 6 to 3.75 per cent.

Kallum Pickering, chief economist at Peel Hunt, also said the latest inflation data ‘increases the hope that the Bank of England may cut again in 2025.’