Citigroup joined Goldman Sachs on Monday in forecasting Bank of England rate hikes later this year, a reversal from both brokerages’ previous expectation that UK rates would stay at 3.75 percent through 2026, as wholesale energy costs and stronger growth data rebuild the inflation case.
Goldman expects a quarter-percentage-point hike in November 2026. Citigroup expects one hike later this year and another in early 2027, likely in November and February. Both had previously expected the bank to hold rates unchanged throughout the year. The shift lands days before the Monetary Policy Committee’s September 17 meeting, where economists expect a sixth straight hold.
“Recent weeks have seen significant increases in wholesale energy prices, a larger rise in headline inflation than the Bank had expected, and strong growth data,” Goldman analysts wrote in a note. UK inflation sits at 2.9 percent against a 2 percent target, and the economy expanded in July at its fastest annual pace in 18 months, supported by artificial intelligence investment and momentum from a strong first half.
The energy shock behind the reversal
The driver is oil. Houthi forces took out Saudi Arabia’s East-West pipeline with a drone attack, threatening up to 4 percent of global oil supply, and Brent crude has climbed above $107 a barrel from the $70-90 range that prevailed for months. Traffic through the Strait of Hormuz remains limited and Gulf-Iran talks on reopening it were postponed, keeping a risk premium in every barrel.
The pass-through to consumers is already visible in fuels. US diesel has gained roughly 60 percent since February and hit a record $6 per gallon, and European diesel and gasoline trade far above pre-conflict levels. Britain imports a large share of its energy, so wholesale moves reach household bills with a lag, and the Ofgem price cap is set to rise 4 percent in October with analysts warning of a further 9 percent in January.
The Bank’s own July forecast expected inflation to rise later this year on energy costs, peaking near 3.25 percent in the final quarter. What has changed since is the size of the energy move and the strength of growth data, both of which push the risk toward a longer inflation episode rather than a brief one. The bank’s summary of its July deliberations noted that the impact of the energy shock on the UK economy remains uncertain, which is the polite version of saying nobody knows how long the war premium lasts.
A committee already split
The MPC voted 6-3 to hold at its July meeting, with chief economist Huw Pill, Catherine Mann and Megan Greene voting for an immediate increase to 4 percent. The dissent bloc has grown over successive meetings, from one hawk in April to three by July, and analysts expect the same three to dissent again on Thursday.
That split captures the bank’s dilemma. Inflation has fallen faster than expected from its 2025 peaks, and the labor market has loosened, with more people looking for work than jobs available. Governor Andrew Bailey has emphasized that monetary policy cannot affect global energy prices, only prevent the shock from feeding into persistent domestic inflation. Holding through an energy spike is defensible if the spike reverses; hiking into it risks compounding a slowdown if the war de-escalates.
The brokerages’ new calls suggest they think the committee will eventually choose the second risk as the more dangerous one. Both still expect the easing cycle to resume by the end of 2027, so the forecast is for a temporary tightening, not a return to the 5.25 percent peak of 2023. Citigroup also expects a more hawkish message from the bank this month even if the rate itself does not move.
What it means for markets
Rate expectations have been moving across the board. The Fed meets Tuesday with a quarter-point hike nearly priced in, and the Bank of Japan is expected to raise its policy rate to 1.25 percent on September 18, the fastest pace of tightening under Governor Ueda. Central banks that spent 2024 and 2025 cutting are now being pulled back toward hikes by the same energy shock, an unusual synchronized reversal.
For UK assets, a November hike priced into the curve would support the pound and pressure gilts, which have already been selling off as yields hit multi-year highs. Mortgage rates, which had stabilized after the 2025 cuts, would face renewed upward pressure. The Item Club’s chief economic adviser Matt Swannell called Thursday’s hold a near certainty but flagged the same divisions among rate-setters persisting, with the three July hawks again favoring an immediate increase.
Households sit at the sharp end. The price cap increases land in October and January, diesel and petrol costs feed into transport and food prices, and wage growth has been cooling. Real income pressure from energy is the mechanism that turned a Middle East conflict into a UK monetary policy problem, and it operates with a lag that makes the committee’s September decision look easy only until the October data arrives.
The bigger question is fiscal. A government borrowing at higher yields while energy subsidies and price caps absorb part of the shock faces a squeeze from both directions. The Bank has repeatedly noted that mortgage rates and corporate borrowing costs are already higher than before the conflict, dampening demand on their own. Adding a rate hike on top would be a deliberate choice to trade weaker growth now for a shorter inflation tail later, and the September 17 vote count will show how far the committee is willing to go.