Bank of England issues stark warning on energy price hike ahead after interest rate decision

On the face of it, you could be fooled into thinking that nothing had changed.

The Bank of England just voted, once again, to leave interest rates on hold at 3.75%. Once again, three members of the monetary policy committee (MPC) voted to raise rates.

But, beneath the surface, the Bank dropped some heavy hints that Britons should prepare themselves for higher inflation and higher interest rates.

Money latest: Energy bills forecast to leap 25% in January

In the minutes alongside today's decision, it said it now expected the consumer price index (CPI) measure of inflation to hit about 3.75% in the final three months of this year, compared with its previous forecast of 3.2%. By early next year, inflation could be well above 4%.

It warned households that the Ofgem price cap determining their bills was to rise by 4% in the final quarter of this year, and that it expected a further 24% hike in the first quarter of next year, pushing up the average household energy bill by hundreds of pounds.

That comes amid a sudden spike in the price of oil, gas, diesel, and a host of other energy-related products, amid the escalation of military activity in the Gulf, and the shutdown of a key pipeline taking oil out of Saudi Arabia.

Back when the Bank of England published its last economic forecast in July, it produced two extra scenarios for where the economy might go if things were either worse or better than expected: an adverse and a milder scenario. In the minutes alongside today's meeting, the Bank signalled that thanks to spikes in energy prices, the economy now seemed to be tracking the adverse scenario.

What does that mean in practice? It means inflation rising to 4.1% by this time next year. It means the Bank of England's interest rates rising to 4.25%. And it means weaker economic growth for the next year or two. It is, if not bleak, then certainly a depressing outlook for the next few years.

Much, though, depends on what happens next in the Gulf. What happens to oil prices, to gas prices and to the other forces that have left much of the world fretting about another leg to the cost of living crisis?

Either way, while the Bank left interest rates on hold today, most economists now expect them to raise them in the coming months, in order to tackle rising prices.

However, in a sense, the more chewy issue from the Bank of England concerns something else entirely.

It is proposing to dramatically rejig the way it's carrying out what is known as "quantitative tightening" (QT) - essentially its scheme to reverse the emergency purchases of hundreds of billions of pounds of government bonds during the financial crisis and the pandemic.

At the risk of simplifying enormously (really the only way to ponder this without going slightly mad), in the years since the Bank embarked on QT, selling off tens of billions of government bonds each year since 2022, there have been two problems.

The first is that it has caused some bond yields - especially those of long-dated gilts - to rise, which in turn has slightly pushed up interest rates paid by households. The second is that the process of selling off these bonds has worsened the public finances, since many of the bonds are being sold off at a loss.

Today, the Bank warned that as it gets to the very bottom of the barrel of those bonds, it runs the risk of losing even greater amounts (on behalf of the taxpayer) if selling particular bonds for which there is little appetite. Its proposed solution is to sell those bonds not into financial markets, but to the government's Debt Management Office instead.

It is a highly complex, and somewhat unorthodox, proposal. But then QE (quantitative easing) and QT were themselves unprecedented, so that is no surprise.

The question is how financial markets, already facing heightened yields at a time of high economic stress, react. At the time of writing this, no one was entirely sure.

(c) Sky News 2026: Bank of England issues stark warning on energy price hike ahead after interest rate decision