Bank of England inflation expectations among UK firms rose in September, according to the central bank’s Decision Makers’ Panel survey, adding pressure on rate-setters ahead of a meeting that will follow the Chancellor’s Budget. One-year ahead CPI inflation expectations climbed from about 3.1 per cent in August to 3.3 per cent last month, while longer-term inflation and wage growth predictions also edged higher.
The monthly survey, which feeds directly into deliberations by the Bank’s nine-strong Monetary Policy Committee (MPC), showed that the majority of responding firms consider higher energy prices to be having a high impact on their price-setting decisions. A higher proportion of businesses also reported that uncertainty levels were very high, a reading that puts the UK economy on less steady footing ahead of what promises to be a pivotal period for monetary policy.
Energy prices at the root of Bank of England inflation expectations
The backdrop to the survey is a sharp rise in global energy costs. Brent crude, a benchmark for international oil prices, hovered around $100 per barrel on Friday. Before conflict broke out across the Middle East in late February, prices sat at under $70 per barrel, a rise of more than 40 per cent. Firms responding to the Bank of England survey flagged energy costs as the main channel through which price pressures were being passed on to consumers.
The Bank’s own central forecast suggests that inflation could top four per cent in the early months of next year. Both short-term and long-term UK government bond yields have risen in recent weeks, reflecting the market’s growing unease about the inflation trajectory. The survey results arrive at a sensitive moment: the MPC’s next scheduled meeting is roughly a month away and will come after HM Treasury Chancellor John Healey’s Budget, meaning rate-setters will have to weigh fiscal policy changes alongside the energy shock when they vote.
Rate-setters divide over how far to go
Over the past week, several MPC members have cautioned that interest rates may have to rise from their current level of 3.75 per cent if global energy prices remain elevated. Governor Andrew Bailey, alongside members Clare Lombardelli and Sarah Breeden, have each signalled that a further tightening remains possible under that scenario.
Catherine Mann has gone further, suggesting the Bank needs to raise rates to maintain credibility with markets. Her position represents the hawkish end of a committee that is visibly divided on how to respond to a supply-side energy shock.
On Wednesday, MPC member Alan Taylor struck a more cautious note. Taylor, whom the Bank regards as sitting on the more dovish end of the committee, said rate-setters had to remain ‘vigilant’ but warned that policy did not need to ‘react mechanically’ to energy market moves. He pointed to a weak labour market and falling food inflation as reasons to think the current shock might be less persistent than the one the UK endured in 2022.
‘Taken together, these developments suggest that the economy is proving less susceptible, at least so far, to a repeat of the dynamics seen in 2022,’ Taylor said.
His caution rests on a distinction that will matter greatly at next month’s MPC vote: whether firms actually follow through on higher price expectations or whether softening demand and a cooling jobs market prevent them from doing so. The Decision Makers’ Panel survey suggests the former risk is building; Taylor’s reading of the data suggests the pass-through may still be contained.
The survey results were first reported by City A.M., which noted the figures will weigh on policymakers ahead of a decision that has rarely felt more finely balanced. With the Budget intervening before that vote, the MPC faces an unusually cluttered set of inputs when it next convenes.
