Bank of England tipped to raise interest rates this week for first time since 2023

Economists and financial markets expect the Bank’s Monetary Policy Committee to approve the increase amid growing concerns about inflation.

The Consumer Prices Index measure of inflation rose to 3.5 per cent in September, its highest level in 11 months.

This leaves inflation well above the Bank’s two per cent target and has increased pressure on policymakers to act.

Higher petrol and diesel prices linked to the conflict in the Middle East have been one of the main causes of the increase.

Household energy bills could push inflation even higher over the winter. Ofgem’s price cap rose by 3.6 per cent for a typical household on October 1, with a further 22 per cent increase forecast for January.

The expected rise means further interest rate increases could remain possible if inflation continues to climb.]

Businesses are also finding it increasingly difficult to absorb higher energy costs, raising the risk that they will pass them on to customers through higher prices.

Ellie Henderson, an analyst at Investec, warned that businesses may be “not willing or able to shoulder the burden of higher energy prices for much longer”.

She said the Monetary Policy Committee should approach Thursday’s decision by considering the risk of inflation becoming more persistent.

Ms Henderson said: “We imagine that many committee members’ patience with the recent rise in inflation has worn thin.”

She added: “The longer energy prices remain elevated, the greater the risk that a temporary price shock becomes more permanent; a ‘risk management’ hike could guard against this.”

The concern is that persistent cost pressures across the energy supply chain will gradually filter into broader consumer prices, making inflation harder to bring back under control without more aggressive intervention later.

Suren Thiru, chief economist at the Institute of Chartered Accountants England and Wales, said an “interest rate rise to 4% looks all but certain,” describing it as a “precautionary hike to contain price pressures.”

Mr Thiru suggested the Bank’s updated forecasts would paint a mixed picture, with modestly stronger growth this year offset by a weaker outlook further ahead as rising inflation and elevated energy costs weigh on the economy.

Despite the headwinds, there have been some encouraging signals.

The economy posted unexpected growth of 0.1 per cent in August, pointing to a degree of resilience amid consumer spending pressures and broader instability linked to the conflict in the Middle East.

Unemployment also fell to 4.7 per cent in the three months to August, its lowest level in over a year.