Monetary Policy Report - November 2026

Monetary Policy Summary

At its meeting ending on 4 November 2026, the Monetary Policy Committee (MPC) voted by a majority of 8–1 to increase Bank Rate by 0.25 percentage points, to 4%. One member voted to increase Bank Rate by 0.5 percentage points, to 4.25%.

The conflict in the Middle East is now in its ninth month. Global energy prices have continued to rise from an already elevated level. UK CPI inflation increased to 3.5% in September. It is now expected to rise to around 5% by the middle of next year. It is then projected to fall as the impact of rising energy prices on 12-month inflation rates fades, and still restrictive monetary policy bears down on inflation.

While the direct effects of higher energy prices are clear, and will continue to feed into firm and household energy bills, there remains limited evidence of knock-on effects on other prices and wages. However, the degree of inflationary pressure in the pipeline is now sufficient to warrant an increase in Bank Rate. Activity data in recent months have generally been stronger than expected, adding to the case for modestly tighter monetary policy.

Monetary policy is not on a pre-set path. The Committee will continue to assess the evidence at each meeting, in particular how likely high energy prices are to feed through to other prices and the economy more broadly, by monitoring the evolution of underlying pay, pricing behaviour, and slack. The Committee will adjust Bank Rate as necessary to ensure CPI inflation returns to the 2% target in the medium term.

Monetary Policy Overview

Global energy prices have risen materially further since July from already high levels and are continuing to have a large effect on the outlook for UK inflation.

CPI inflation was 3.5% in September and is set to rise further in coming months. That is mostly because of the direct effects of higher global energy prices on fuel and household utility prices.

The MPC is setting monetary policy to make sure that the effects of higher energy prices do not become embedded in inflation, so that inflation returns to the 2% target and stays there.

At this meeting, the MPC voted to raise Bank Rate by 0.25 percentage points to 4%. The MPC’s approach to setting interest rates, including today’s decision, is based on two key judgements.

Key policy judgement 1

Despite limited evidence so far of knock-on effects from higher energy prices, the degree of inflationary pressure in the pipeline is now sufficient to warrant an increase in Bank Rate.

While the direct effects of higher energy prices are already clear in UK consumer prices, and will continue to feed through into households’ and companies’ energy bills, there remains limited evidence of knock-on effects on other prices or wages. Indirect effects arising from companies at home and abroad passing on increases in their energy costs through supply chains have been limited, including for food (Box B: The outlook for food price inflation). And there are few signs yet of changes in wage or price-setting behaviour that would feed through into broad-based inflationary pressures – often referred to as second-round effects (Box A: An update on evidence for second-round effects from the rise in energy prices).

But the further rise in energy prices since July means that, all else equal, it is likely that inflationary pressures will be stronger and more persistent than previously expected. With companies facing bigger increases in their costs, and households facing a larger reduction in the purchasing power of their pay, companies are more likely to respond to higher energy prices by raising wages and prices.

Companies and households may be particularly responsive to higher energy prices at present, which could amplify the impact on other prices and wages. Energy prices are highly visible, and headline inflation is already around levels at which responsiveness has increased in the past. Companies’ and households’ experience of high inflation over the past five years may also have made them more likely to raise prices and bargain for higher wages in response to the current energy price shock.

In July, the MPC judged that weakness in economic activity and the labour market would help contain the knock-on impacts of higher energy prices by limiting companies’ pricing power and workers’ ability to bargain for higher wages. Since then, economic activity has been more resilient than expected and there have been signs of stabilisation in the labour market (Box C: Recent resilience in UK economic activity). That has increased the risk that higher energy prices will feed through into broad-based inflationary pressures.

Setting aside the effects of higher energy prices, the latest data suggest that domestic inflationary pressures may have stopped easing. Several measures of services price inflation and wage growth, which had been falling since before the start of the conflict in the Middle East, have flattened off in recent months.

Taking all of the evidence together, the MPC judges that the degree of inflationary pressure in the pipeline is now sufficient to warrant an increase in Bank Rate.

Key policy judgement 2

Where Bank Rate goes from here will depend on how the likely strength of inflationary pressures evolves.

As higher energy prices continue to work their way through the economy, inflation is expected to rise to around 5% by the middle of 2027 before starting to fall back towards the MPC’s 2% target.

How quickly inflation will fall is uncertain and depends on a range of factors that will affect the strength of inflationary pressures (Section 3.1). These include the scale and duration of the rise in energy prices, how wage and price-setting behaviour respond, and how resilient demand is in the face of higher energy prices and tighter financial conditions – as well as on the response of monetary policy.

To help illustrate some of the uncertainties around the likely strength of inflationary pressures, the Report contains two scenarios alongside a central projection that is judged to provide a reasonable baseline for the economic outlook (Section 3.2).

• The adverse inflation scenario assumes that energy prices rise sharply again and remain elevated for a prolonged period. This higher path for energy prices is assumed to lead to much stronger second-round effects than in the central projection.
• The weaker demand scenario assumes that the recent resilience in activity does not continue in the face of high energy prices, for example because there are limits to how much households can maintain spending by cutting saving, or because businesses become less able to absorb higher costs as their financial resources are depleted. In this scenario, demand is assumed to be weak enough to prevent any second-round effects from emerging.

Monetary policy will need to adjust depending on the likely strength of inflationary pressures. For example, if substantial second-round effects appear likely to emerge, monetary policy would have to be tighter than otherwise. But if evidence continues to indicate that second-round effects will be limited, then monetary policy would be looser.

The model-based policy simulations in Section 3.3 of the Report help illustrate how monetary policy may need to respond depending on the degree of inflationary pressure. These rules inform the MPC’s assessment, but do not translate mechanically into the Committee’s decisions.

• For the central projection, the illustrative policy rules overall are broadly similar to the market curve in the near team but somewhat lower after that.
• For the adverse inflation scenario, inflationary pressures are stronger than in the central projection and the illustrative policy rules are materially tighter than those for the central projection.
• And for the weaker demand scenario, inflationary pressures are weaker than in the central projection, mainly in the second half of the forecast period. As a result, the illustrative policy rules are similar to those for the central projection in the first part of the forecast but looser further out.

The Committee will continue to assess the evidence on how the likely strength of inflationary pressures is evolving at each meeting and will adjust Bank Rate as necessary to ensure CPI inflation returns to the 2% target in the medium term.

1: Current economic conditions

1.1: Inflation

CPI inflation rose to 3.5% in September, with the direct effects of higher energy prices accounting for much of the increase since June.

CPI inflation has risen from 2.6% in June to 3.5% in September (Chart 1.1), partly owing to higher household electricity and gas prices (Chart 1.2). Motor fuel prices have also risen over that period following the re-escalation of the conflict in the Middle East. Diesel and petrol pump prices are around 40% and 30% higher, respectively, than prior to the start of the conflict.

CPI inflation has been somewhat higher than projected in the July Report. Inflation in September was 0.4 percentage points higher than anticipated (Chart 1.1), mainly reflecting motor fuel prices rising rather than easing as had been projected.

Household utility bills and motor fuel prices accounted for around 60% of the overshoot of CPI inflation relative to the 2% target in September, with services prices accounting for most of the remainder.

Chart 1.1: CPI inflation rose to 3.5% in September and is projected to reach around 5% in 2027 Q2

CPI inflation and projections ^(a)

Footnotes

• Sources: ONS and Bank calculations.
• (a) The solid aqua line shows CPI data to September 2026, the dashed aqua line shows Bank staff near-term projections from October 2026 to March 2027, and the aqua diamond shows the central projection for 2027 Q2. The dashed gold, orange and purple lines show the near-term projections in the February 2026, April 2026 and July 2026 Reports, respectively. ↩

Chart 1.2: Direct energy effects have driven recent increases in CPI inflation, and they are projected to build further in the near term

Contributions to CPI inflation ^(a)

Footnotes

• Sources: Bloomberg Finance L.P., Department for Energy Security and Net Zero (DESNZ), ONS and Bank calculations.
• (a) Figures in parentheses are CPI basket weights in 2026. Data are shown to September 2026. Bank staff projections of component-level contributions are shown from October 2026 to March 2027. The food component is defined as food and non-alcoholic beverages. The fuels and lubricants estimates use weekly DESNZ petrol and diesel price data which cover the first half of October 2026 and are then projected based on petrol and diesel futures curves. The electricity and gas bars also include liquid fuels. Direct energy effects are the combined contribution from electricity and gas, and fuels and lubricants (the orange and green bars). Inflation rates for the CPI components shown are included in the accompanying spreadsheet published online. ↩

Evidence of indirect energy effects has so far been limited.

Indirect effects arise as higher energy costs are passed through supply chains to consumer prices (Box A of the July 2026 Monetary Policy Report). These effects have been smaller than anticipated in the July Report (Chart 1.3, orange bars in left panel) and recent data suggest little impact on CPI inflation so far. Some of this appears to reflect limited pass-through of higher wholesale energy prices to firms’ costs (Chart 1.3, right panel). Measures of the prices of electricity and gas paid by firms have not yet risen significantly. Contacts of the Bank’s Agents suggest that this may be partly explained by greater use of fixed-price contracts and hedging arrangements than ahead of the energy shock following the Russian invasion of Ukraine. Where firms have faced cost increases, evidence from the latest DMP survey suggests that they have absorbed some of the rise by accepting lower margins (Box A).

It remains uncertain whether fuller pass-through of costs along the supply chain will occur later, or if the smaller than expected indirect effects to date could be consistent with a smaller eventual impact from the initial rise in energy prices between March and July. Earlier steers from business surveys and intelligence from the Bank’s Agents pointed to significant disruption to supply chains and energy-intensive sectors, but subsequent evidence suggests that this has been less severe than initially expected. Smaller than anticipated indirect effects have been most apparent in food prices (Box B).

Chart 1.3: Indirect effects have been smaller than projected in the July Report, with firms’ electricity and gas costs not having yet risen significantly

CPI inflation relative to the projection in the July Report; ^(a) weighted-average electricity and gas producer input prices ^(b)

Footnotes

• Sources: ONS and Bank calculations.
• (a) The bars show contributions to CPI inflation relative to the projection in the July Report. The bars to September 2026 are based on CPI outturns. The bars from October 2026 to March 2027 are based on Bank staff projections. As Bank staff’s July 2026 short-term inflation projection covered only six months, the expected direct energy contribution for 2027 Q1 at the time of the July Report has been estimated using wholesale energy prices averaged over the 15 UK working days to 20 July 2026. The light aqua, orange, purple and gold bars for 2027 Q2 compare the November 2026 and July 2026 central projections. The orange bars capture both domestic and imported indirect effects. The gold bars show the estimated impacts of the extension to the VAT cut on household electricity bills until 2027 Q2 and the postponement of the rise in fuel duty until July 2027, announced in Budget 2026. The aqua bars show the projected change in direct effects since the July Report, excluding the impact of Budget 2026. ↩
• (b) Electricity and gas input producer price indices (PPIs), excluding the Climate Change Levy, are weighted by their share in firms’ intermediate costs over time. The weights for 2021–23 are calculated using ONS input-output supply and use tables and are then projected forward for 2024–26 using industry output deflators. More details on the construction of these weights are provided in Box A of the November 2025 Monetary Policy Report. The latest data point is for September 2026. ↩

Domestic price pressures remain somewhat elevated.

Services consumer price inflation rose to 3.7% in September, partly reflecting recent volatility in airfares inflation. Having fallen gradually over recent years, measures of underlying services price inflation have been flatter over recent months at around 4% (Chart 1.4). A granular measure of underlying inflationary pressures, which puts more weight on prices that take a relatively central position in the UK’s production network and are normally quite rigid, has also been stable over that period (Munday et al (2026)).

Core goods inflation has picked up a little over recent months. Demand for AI-related products such as memory chips has placed upward pressure on export prices, particularly in China and advanced Asian economies (Box D of the July 2026 Monetary Policy Report), which is likely to have contributed to some of this rise. All else equal, persistently higher UK import price inflation means that the prices of domestically produced goods and services must rise more slowly for overall inflation to remain at the 2% target (Box A of the February 2026 Monetary Policy Report).

Although direct energy effects have driven much of the recent rise in headline inflation, services price inflation continues to account for a material share of the inflation overshoot. There is so far only limited evidence that indirect effects from higher energy are feeding through to services price inflation. Overall, recent price data suggest that domestic inflationary pressures remain somewhat above levels consistent with the 2% inflation target.

Chart 1.4: Measures of underlying services price inflation were broadly flat over 2026 Q3

Measures of annual services price inflation ^(a)

Footnotes

• Sources: ONS and Bank calculations.
• (a) The low-variance measure is calculated by weighting each component of services inflation by the inverse variance of the change in 12-month inflation of that component from 12 months previously. The maximum adjusted weight is capped at twice its original value. Details of the components that have been included in the services excluding indexed and volatile components, rents and foreign holidays measure are provided in the accompanying spreadsheet published online. The trimmed-mean measure excludes the 10% largest and 10% smallest price changes. The latest data points are for September 2026. ↩

Wholesale energy prices have risen significantly since the July Report.

Global crude oil and natural gas markets have tightened following the re-escalation of conflict in the Middle East and because of fears of further escalation over the coming months. While flows through the Strait of Hormuz have increased since the summer, attacks on shipping have raised shipping costs, including through increases in insurance premia. Attacks on energy infrastructure in the region have also disrupted supply through alternative export routes at times. Industry intelligence suggests that lower global demand and a pre-planned increase in global liquefied natural gas (LNG) capacity have only partly mitigated these disruptions. Meanwhile, European gas storage is below its 2018–25 average for this time of year and the US Strategic Petroleum Reserve has fallen to its lowest level in several decades. With lower inventories providing a limited buffer against further disruption, energy prices may be more sensitive to additional supply shocks, or stronger-than-expected natural gas demand in the event of a colder than average winter.

Wholesale energy futures prices have risen significantly since the July Report, reflecting both tighter current supply conditions and upside risks from potential further disruption. In the 15 UK working days to 27 October, the front-month Brent crude oil futures price averaged $108 per barrel, around 70% higher than in the run-up to the February Report, before the conflict began (Chart 1.5, left panel). Based on futures curves averaged over the same 15 UK working days, UK wholesale gas futures prices over the forecast period were, on average, around 65% higher than ahead of the July Report and around 120% above their levels in the run-up to the February Report (right panel).

Chart 1.5: Wholesale energy prices have risen significantly since the July Report

Wholesale Brent crude oil and UK natural gas prices ^(a)

Footnotes

• Sources: Bloomberg Finance L.P., LSEG Workspace and Bank calculations.
• (a) Oil prices are Brent crude in dollars per barrel, and gas prices are Bloomberg UK NBP Natural Gas Forward prices. In the left panel, the solid aqua line shows historical spot oil prices and the dashed aqua, orange and purple lines show futures curves based on forward prices averaged over the 15 UK working day periods to 27 October, 20 July 2026 and 26 January 2026, respectively. In the right panel, the solid aqua line shows the historical evolution of the 12-month ahead natural gas futures price. The dashed aqua, orange and purple lines show 12-month ahead average gas futures curves, averaged over the same 15-day periods as the oil curves. The final data points for the November 2026 oil and gas futures curves are December 2029 and December 2028, respectively. The December 2028 gas futures data point is calculated as the average futures price between January 2029 and December 2029. ↩

Crack spreads – the difference between refined petroleum product prices and crude oil prices – have remained very elevated for jet fuel and diesel but have eased for petrol (Chart 1.6). Refinery outages in the Middle East, restrictions on Chinese oil product exports, reduced Russian oil product exports and limited spare refining capacity outside Asia have constrained the supply of some refined petroleum products. These pressures have been only partly offset by co-ordinated releases of strategic oil product (including diesel) reserves by G7 countries.

Higher crude oil shipping costs have also raised refiners’ costs and compressed margins. If sustained, that could lead to lower refining activity and place further upward pressure on refined product prices.

Chart 1.6: Crack spreads remain very elevated for jet fuel and diesel

Jet fuel, diesel and petrol crack spreads ^(a)

Footnotes

• Sources: LSEG Workspace and Bank calculations.
• (a) The aqua, orange and purple bars show the spread between spot Northwest Europe (NWE) jet fuel, ultra-low sulphur diesel and regular unleaded petrol prices, and front-month Brent crude oil futures prices, using a conversion of 7.88, 7.45 and 8.33 barrels per tonne, respectively. The February 2026, April 2026, July 2026 and November 2026 bars are averages over the 15 UK working day periods to 26 January 2026, 22 April 2026, 20 July 2026 and 27 October 2026, respectively. ↩

Higher energy prices are projected to drive a further increase in CPI inflation.

Household energy prices are expected to rise further in the near term, following recent rises in wholesale prices. The Ofgem price cap rose to £1,723 in 2026 Q4 from £1,663 in Q3 and £1,477 in Q2. It is expected to increase to around £2,150 in 2027 Q1. Both the 2026 Q4 and 2027 Q1 figures include the temporary removal of VAT on household electricity bills from October. These rises in the Ofgem price cap are expected to increase the contribution of household energy prices to CPI inflation over the coming quarters, while the contribution from motor fuel prices is expected to remain elevated over that period (Chart 1.2).

Taken together, direct energy effects are projected to contribute around 1.4 percentage points to CPI inflation in 2027 Q1 (Chart 1.2), significantly more than anticipated in the July Report, after accounting for the effects of measures announced in Budget 2026. In 2027 Q2, the direct impact of higher energy prices is projected to be 1.1 percentage points larger than expected in the July Report, after accounting for Budget 2026 measures, which are expected to reduce CPI inflation directly by around ¼ percentage point in that quarter (Chart 1.3, left panel and Box F).

CPI inflation is projected to rise to around 5% in 2027 Q2.

As fixed-price contracts and hedging arrangements expire, the impact of higher energy prices on firms’ costs is expected to become more widespread. Indirect effects are expected to contribute around ½ percentage point to CPI inflation, on average, in 2027 Q1. Although that is less than expected at the time of the July Report (Chart 1.3, left panel), increases in wholesale energy prices since then will raise firms’ costs by more than previously anticipated over the coming quarters. As a result, indirect effects are expected to be larger than projected in the July Report by 2027 Q2 (Chart 1.3, left panel).

As the indirect effects of higher energy prices build, inflation in a range of non-energy CPI components is expected to rise. Food price inflation could pick up to around 4¾% by mid-2027, largely reflecting pass-through of higher energy costs along food production and distribution chains. The current El Niño event, and to a lesser extent this summer’s European droughts and heatwaves, are estimated to push up food prices later in the forecast period (Box B).

Core goods inflation could increase to over 2½% in 2027 Q2, partly reflecting building indirect effects. Contacts of the Bank’s Agents report that higher prices for energy-intensive inputs, alongside rising transportation costs for some firms, will push up core goods prices.

Stronger import price inflation is also expected to push up core goods inflation, given the relatively high import intensity of these goods. Higher energy prices are expected to raise costs for firms abroad, while strong demand for AI-related products from China and advanced Asian economies is expected to put further upward pressure on import prices. Together, these effects are expected to keep UK import price inflation elevated over the coming quarters.

CPI inflation is projected to average 4.9% in 2027 Q2 (Chart 1.1) as the contribution from direct energy effects remains elevated while indirect effects build further. The near-term outlook remains highly uncertain, and sensitive to developments in the Middle East and their resulting impact on wholesale energy prices (Section 3).

Domestic wage and inflationary pressures

Domestic inflationary pressures are expected to remain somewhat elevated in the near term.

Although higher energy prices are expected to drive the near-term rise in headline inflation, underlying domestic inflationary pressures are expected to remain somewhat elevated. This continues the recent trend in these indicators.

The latest Annual Survey of Hours and Earnings indicates that median private sector gross weekly earnings grew by 4.1% in the year to April 2026, higher than private sector regular average weekly earnings (AWE) growth of 3% but broadly in line with several other measures of pay growth at that time (Chart 1.7).

Timelier measures of pay growth have changed little over recent months. Private sector regular AWE growth was 3% in August and is projected to remain around that level over the remainder of 2026 (Chart 1.7). Meanwhile, other indicators continue to point to somewhat stronger private sector wage growth. The DMP survey and Indeed Wage Tracker continue to suggest pay growth of around 4%. A private sector pay proxy derived from HMRC RTI data is also stronger than the official measure. However, part of the gap between headline AWE growth and other measures continues to reflect compositional shifts towards lower-paid industries. Overall, Bank staff judge that underlying wage growth remains a little above its target-consistent rate, although there is uncertainty around that estimate (Box A of the February 2026 Monetary Policy Report).

Higher energy and food prices are expected to increase non-labour costs for many firms in the services sector, including airlines, hospitality and leisure services. Taken together with underlying wage growth remaining somewhat elevated, these cost pressures are expected to keep services price inflation around its current rate over the coming months. As indirect effects build, services inflation will become a less clear indicator of underlying domestic inflationary pressures. Nevertheless, given the expected pickup in core goods inflation, domestically generated inflation is likely to remain above the level consistent with the 2% inflation target in the near term.

Chart 1.7: Private sector wage growth is expected to be little changed over the coming months

Measures of private sector wage growth ^(a)

Footnotes

• Sources: DMP survey, HMRC, Indeed, ONS and Bank calculations.
• (a) The private sector regular pay growth line shows the ONS measure of private sector regular AWE growth, measured as the three-month average on the same period a year earlier. The DMP line shows average realised pay growth from the DMP survey on the same basis, while the HMRC RTI line shows a proxy of growth in median pay in the private sector, also measured as the three-month average on the same period a year earlier. Bank staff construct the HMRC RTI measure by taking median pay for each industry – excluding public administration and defence, education, health and social work – and weighting them by industry shares in payrolled employment. Annual growth is then calculated using the Laspeyres formula, holding industry weights fixed at their levels a year earlier to reduce the effect of changes in workforce composition. The Indeed Wage Tracker line shows annual average job title matched pay growth for UK job vacancies. The latest data points are for the three months to August 2026 for private sector regular pay, September 2026 for the HMRC RTI private sector median and the Indeed Wage Tracker, and October 2026 for the DMP survey. The private sector regular pay growth projection diamonds are for the three months to September and December 2026. ↩

Short-term inflation expectations remain elevated.

The energy shock could generate more persistent inflationary pressures if higher prices lead households and firms to revise up their inflation expectations, which then feed through to wage and price-setting decisions (Box A).

Short and medium-term household inflation expectations remain above their pre-conflict levels, although they have fallen from their peaks earlier in the year (Chart 1.8, left panel). Households’ attentiveness to inflation-related news continues to be high (Box A). Businesses’ short-term inflation expectations also remain slightly above their pre-conflict levels, while medium-term expectations have been broadly stable (Chart 1.8, middle panel).

Short-term market-based measures of inflation compensation have increased since the July Report, likely reflecting higher near-term inflation expectations following the rise in energy prices. Medium-term measures, such as the five-year, five-year forward inflation swap rate, have increased by less (Chart 1.8, right panel). The latest Market Participants Survey (MaPS), which may provide a cleaner read of inflation expectations than market-based measures (Section 1.1 of the July 2026 Monetary Policy Report), points to an increase in respondents’ inflation expectations since the July Report. The median respondent expected CPI inflation to be 3% one year ahead and just above the 2% target at the three-year horizon.

Chart 1.8: Short-term inflation expectations remain elevated

Survey-based measures of household ^(a) and business inflation expectations ^(b) and market-based measures of inflation compensation ^(c)

Footnotes

• Sources: Citigroup, DMP survey, LSEG Workspace, YouGov and Bank calculations.
• (a) The data are from the Citi/YouGov survey and are based on responses to the questions: ‘How do you expect consumer prices of goods and services will develop in the next 12 months?’, and ‘And what do you think will happen to the prices of goods and services, on average, over the longer term – say five to ten years?’. The dashed lines represent the series averages over 2010–19. The latest data points are for October 2026, with the survey conducted between 21–22 October. ↩
• (b) The data are from the DMP survey and show three-month averages. The data are in response to the question: ‘What do you think the annual CPI inflation rate will be in the UK, one year from now and three years from now?’. The latest data points are for October 2026, with the survey conducted between 2–16 October. The DMP survey data have a short back-run, so no historical averages are shown. ↩
• (c) The data show cumulative changes in market-based measures of inflation compensation since 31 December 2025. The orange line shows the one-year inflation swap rate, and the aqua line shows the five-year, five-year forward inflation swap rate. The final data points are for 27 October 2026. ↩

1.2: Activity

Domestic demand

GDP growth has been more resilient than expected…

GDP growth was 0.5% in 2026 Q2 and is expected to have picked up further to 0.7% in Q3 (Chart 1.9, aqua line). This is much stronger than the July projection, which expected growth of 0.3% and 0.1% in Q2 and Q3 respectively, despite higher inflation and elevated economic uncertainty. Revisions to historic data in Blue Book 2026 have also raised the level of GDP by 0.5% in Q2, largely reflecting stronger growth between 2010 and 2019.

The collective steer from business survey indicators also suggests economic activity has picked up to some degree. This metric, which informs Bank staff’s view of momentum in GDP, points towards growth of 0.2% in 2026 Q3 (Chart 1.9, orange line). The range of factors explaining the resilience in activity is assessed further in Box C.

The headwinds to activity from higher inflation, tighter financial conditions and ongoing fiscal consolidation are expected to offset support from AI-related activity and business investment. GDP growth is projected to slow in 2026 Q4 and 2027, closer to growth rates implied by recent business surveys.

Chart 1.9: GDP growth has been strong in recent quarters

Quarterly growth in headline GDP and growth implied by business surveys ^(a)

Footnotes

• Sources: Bank of England Agents, BCC, CBI, Lloyds Business Barometer, ONS, S&P Global and Bank calculations.
• (a) The final data point for quarterly headline GDP growth is for 2026 Q2. The diamonds for 2026 Q3 and Q4 show Bank staff projections. Growth implied by business surveys is from a survey indicator model, based on a staggered-combination mixed-data sampling (MIDAS) approach (Moreira (2025)). The orange diamonds to 2026 Q2 show in-sample fitted values of the survey indicator model, and the diamond for Q3 shows an out-of-sample projection. The orange swathe shows the interquartile range of estimates from individual survey indicators in the model, and values have been interpolated between quarters. ↩

… reflecting strength in business-to-business services.

Recent strength in GDP has been accounted for primarily by growth in the services sector, particularly among business-to-business services such as information and communications services. Growth in business-to-business services contributed around 0.4 percentage points to quarterly GDP growth in 2026 Q2. More recent data suggest that this momentum has continued into Q3. GDP grew by 0.7% in the three months to August, compared to the previous three months, of which business-to-business services contributed 0.6 percentage points.

Business investment has been robust in recent quarters.

Across the expenditure components of GDP, business investment has been one of the main drivers of stronger-than-expected GDP growth. Although these data are volatile and can be subject to large revisions, business investment grew by 1.8% in 2026 Q2, following growth of 3% in Q1. This was the fastest growth over two quarters since 2022. That strength is expected to have carried over into Q3 when business investment is projected to have risen by around a further 1%. The strength in business investment and business-to-business services partly reflects strength in AI-related demand (Box C). While some measures of business confidence and investment intentions have picked up in recent months, they remain below their historical averages. Some moderation in business investment growth is expected in the near term following its recent strength, with continued uncertainty around the economic outlook also weighing on investment.

Household consumption growth has been somewhat stronger than expected in the July Report but is projected to ease in the near term as real incomes fall.

Consumption grew by 0.3% in 2026 Q2 and growth is projected to have edged up to 0.4% in Q3. Within consumption, retail spending has been relatively robust. Retail sales volumes grew by 0.7% in the three months to September relative to the three months prior, although a fall on the month may point to easing momentum. A modest pickup in real household incomes in the first half of 2026 is likely to have supported consumption through the initial phase of the energy shock (Chart 1.10).

Consumption growth is projected to ease to 0.2% in 2026 Q4. Real household incomes are expected to fall in the coming quarters (Chart 1.10) as higher energy prices continue to feed through to CPI inflation. Higher interest rates since the start of the conflict in the Middle East will also raise mortgage payments (Section 1.3). The GfK consumer confidence index fell sharply in October, reversing improvements in recent months and returning to around its level in April, shortly after the conflict began.

Chart 1.10: Aggregate household real income is projected to decline in 2026 H2

Contributions to four-quarter growth in real post-tax household income ^(a)

Footnotes

• Sources: ONS and Bank calculations.
• (a) The diamonds show Bank staff projections for 2026 Q3 and Q4. The bars may not sum to the total due to rounding. Income includes non-profit institutions serving households and is defined as total available household resources, deflated by the consumer expenditure deflator. Growth in real post-tax household income is calculated using the following ONS codes: RPQK/((ABJQ+HAYE)/(ABJR+HAYO)). ↩

Housing market activity has weakened, and house prices have fallen.

Mortgage approvals for house purchase fell by 8% in the three months to September relative to the three months prior and reached their lowest monthly level since 2023. Much of this weakness is likely to reflect the rise in mortgage rates since the start of the conflict (Section 1.3). Contacts of the Bank’s Agents also report that higher quoted mortgage rates have weighed on demand (Agents' Summary of Business Conditions – October 2026). Heightened uncertainty may also have played a role, with respondents to the September RICS survey attributing some of the weakness in demand to uncertainty associated with the economic outlook and upcoming policy announcements. House prices have also fallen, with the ONS UK House Price Index falling by 0.8% in the three months to August relative to the three months prior. Forward-looking indicators point to continued weakness in the near term. New buyer enquiries in the September RICS survey remained in contractionary territory, while house price expectations remained weak. Agents’ contacts also expect house price inflation to remain subdued in the near term.

Labour market

The labour market has been resilient, as employment growth has picked up and unemployment has fallen.

LFS employment growth rose to 0.3% in the three months to August relative to the three months prior. Bank staff’s estimate of underlying employment growth also improved slightly to 0.2% in the three months to October (Chart 1.11, left panel). This reflects a modest improvement in employment intentions indicated by a range of surveys. The KPMG/REC survey pointed to stronger hiring in August and September, while the employment growth indicator from the S&P Global UK PMI survey has improved in recent months. HMRC RTI data nevertheless continued to point to some weakness in private sector payrolled employees. More broadly, output growth has outpaced employment growth since early 2024, implying a pickup in productivity growth (Box D).

The LFS unemployment rate fell to 4.7% in the three months to August (Chart 1.11, right panel). This is lower than the July projection and partly reflects a very sharp fall in the latest single month unemployment estimate, which has been notably volatile in recent months. There have also been few signs of a pick-up in redundancies across a range of indicators.

The unemployment rate is projected to remain broadly flat at 4.8% in 2026 Q4 (Chart 1.11, right panel). Despite only a modest improvement in underlying employment growth, lower projected population growth owing to lower net migration means that employment indicators are now more consistent with a stabilisation in unemployment. 

Chart 1.11: Underlying employment growth has improved a little andunemployment is projected to stabilise

Measures of underlying and LFS employment growth; ^(a) unemployment rate and near-term projections ^(b)

Footnotes

• Sources: Bank of England Agents, DMP survey, HMRC, KPMG/REC UK Report on Jobs, Lloyds Business Barometer, ONS, S&P Global and Bank calculations.
• (a) Bank staff’s indicator-based measure of underlying employment growth is constructed using a dynamic factor model following the approach of Doz et al (2011). The model extracts a common component from monthly survey indicators, capturing comovements across series. The common component is scaled to align with LFS employment growth between 2000–19. The shaded area represents the 95% confidence interval. The latest data are for October 2026 for the estimate of underlying employment based on survey data and for the three months to August 2026 for the LFS. ↩
• (b) The latest data are for the three months to August 2026. The diamonds show Bank staff projections for the three months to September 2026 and December 2026, respectively. Although LFS unemployment data have been reinstated by the ONS, they are badged as official statistics in development and the LFS continues to suffer from low response rates, which can introduce volatility and potentially non-response bias (Box D of the May 2024 Monetary Policy Report). ↩

Indicators of underutilisation also suggest that the margin of slack in the labour market has remained stable. The vacancies to unemployment ratio (V/U) remains below its estimated equilibrium and has been broadly unchanged in recent months (Chart 1.12, left panel). Consistent with that, overall staff availability in the September KPMG/REC survey rose at its slowest pace in three years. The net additional hours desired by workers as a percentage of average hours worked (middle panel), a measure of underemployment, has also stabilised, while the marginal attachment rate (right panel), which captures the share of people not currently looking for work but who would like a job, has eased slightly in recent months.

Chart 1.12: Indicators of underutilisation in the labour market have stabilised

Indicators of labour market slack ^(a)

Footnotes

• Sources: Advertising Association/World Advertising Research Centre Expenditure Report, ONS and Bank calculations.
• (a) The equilibrium V/U ratio in the left panel is estimated using an error-correction model over the period 1982–2025. The real cost of vacancy posting and hourly labour productivity are included as long-run determinants for the level of vacancies. The model also includes controls for short-term movements in these variables (Stelmach et al (2025)). The latest data are for 2026 Q2. The 2026 Q3 data points are projections based on data to the three months to August. The middle panel shows the number of net additional hours that the currently employed report they would like to work, on average, per week, expressed as a share of average weekly hours. The latest data are to 2026 Q2 and the vertical axis is inverted. The data in the right panel are three-month averages of the share of people aged 16–64 who report that they are not in work or not actively looking for work but would like a job. The latest data are for the three months to July 2026 and the vertical axis is inverted. ↩

The economy continues to operate with a margin of spare capacity, which is judged to have stabilised.

Surveys of capacity utilisation suggest spare capacity within firms remains below its historical average, but that it has been broadly stable over the past year (Chart 1.13). Contacts of the Bank’s Agents also continue to report a modest degree of spare capacity (ASBC – October 2026).

Overall, Bank staff judge that the economy continues to operate with a margin of spare capacity, and that this margin has remained broadly stable at around 1% of potential GDP in recent quarters. This is consistent with the recent strength in GDP growth and the stabilisation of employment growth indicators.

Chart 1.13: Capacity utilisation in firms is consistent with a stable margin of slack

Survey indicators of capacity utilisation ^(a)

Footnotes

• Sources: Bank of England Agents, BCC, CBI, S&P Global and Bank calculations.
• (a) Standard deviations from averages between 2000–19. The measures included in the swathe are from the Bank’s Agents, the BCC (non-services and services), the CBI (manufacturing (output relative to capacity); and financial services, business/consumer/professional services and distributive trade (business relative to normal)) and S&P Global (manufacturing (backlogs) and services (outstanding business)). Sectors are weighted using their shares in annual gross value added. The BCC data are not seasonally adjusted. The data are shown to 2026 Q3. ↩

1.3: Global and financial conditions

Global economic activity

Global activity growth has been stronger than expected but is projected to slow.

The conflict in the Middle East has continued to disrupt the global supply of energy. Although some factors have mitigated this disruption, the protracted conflict has led to significantly higher wholesale energy prices since the July Report (Section 1.1). Growth in the UK’s trading partners has proven resilient to the initial effects of the energy shock. This is likely to reflect a combination of factors, including support for global demand from strong AI-related investment in the US, strong AI-related exports in Asia, and increased fiscal spending on defence and infrastructure in the euro area (Box C). Four-quarter UK-weighted world GDP growth was 2.3% in 2026 Q2 and is estimated to have been 2.1% in Q3 (Chart 1.14), 0.4 and 0.3 percentage points higher than expected at the time of the July Report.

Global growth is projected to remain broadly stable in the near term before slowing in 2027 as the effects of the energy shock build and as some of the factors that have supported activity are expected to fade.

Chart 1.14: GDP growth in the UK’s trading partners has been resilient in 2026

Four-quarter UK-weighted global GDP growth with contributions by region ^(a)

Footnotes

• Sources: LSEG Workspace and Bank calculations.
• (a) The figures for 2026 Q3 and 2026 Q4 are Bank staff projections. The preliminary flash estimate for 2026 Q3 euro-area GDP growth and the advance estimate for 2026 Q3 US GDP growth were published after the cut-off for incorporation into the forecast so the data points for that quarter are projections. UK-weighted world GDP growth is constructed using real GDP growth rates of 188 countries weighted according to their shares in UK exports. ↩

Financial conditions

The UK forward OIS curve is higher compared with the July Report.

Based on the 15-day average to 27 October, the UK forward OIS curve (hereafter market curve) was around 60 basis points higher than at the time of the July Report (Chart 1.15), and around 120 basis points higher than prior to the conflict in the Middle East, on average over the next three years. The market curve rises to around 4.9% at the end of 2027 before gradually falling to around 4.7% by late 2029.

The market curve captures both expectations for the future path of Bank Rate and risk premia. The median of responses to the November 2026 Market Participants Survey expected Bank Rate to increase to 4% in November and to 4.25% in February, and for Bank Rate to be 3.5% two and three years ahead. The difference between the market curve and market participants’ expected path for Bank Rate suggests that risk premia continue to contribute to the upward slope of the market curve. Risk premia increased following the outbreak of the conflict in the Middle East, likely reflecting uncertainty around the scale and duration of the conflict, and associated upside risks around interest rates and inflation (Box F of the July 2026 Monetary Policy Report).

Since the July Report, central banks in the euro area and US have raised their respective policy rates. In September, the ECB announced a hike to its deposit facility rate by 25 basis points to 2.50% and the Federal Reserve raised the target range for the federal funds rate by 25 basis points to 3.75%–4.00%. Euro area and US market curves have risen since the July Report and were around 50 basis points and 65 basis points higher respectively, on average over the next three years.

Chart 1.15: The UK forward OIS curve is higher compared with the July Report

Policy rates and instantaneous forward curves for the UK, US and euro area ^(a)

Footnotes

• Sources: Bloomberg Finance L.P. and Bank calculations.
• (a) The November 2026 curves are estimated based on the 15 UK working days to 27 October 2026. The July 2026 curves are estimated based on the 15 UK working days to 20 July 2026. The federal funds rate is the upper bound of the announced target range. The market-implied path for US policy rates is the expected effective federal funds rate. The ECB deposit rate is based on the date from which changes in policy rates are effective. The final data points are forward rates for December 2029. ↩

UK financial conditions have tightened since the July Report.

UK financial conditions have continued to tighten since the July Report. This primarily reflects a further increase in market interest rates. Alongside the increase in short-term rates (Chart 1.15), 10-year UK government bond yields have also risen.

Long-term government bond yields have also risen in the US and in the euro area. Common global factors, including global geopolitical uncertainty, have likely driven much of the moves in yields, alongside concerns around fiscal sustainability. This has been accompanied by an increase in some market-based measures of volatility. In September, option-implied volatility in US Treasury yields rose to levels seen during the early stages of the conflict in the Middle East. French government bond yields have been particularly volatile and have risen sharply.

Domestic credit conditions

Interest rates faced by households have risen further since the July Report.

UK mortgage rates and their reference rates have risen further since the July Report. Quoted rates on 75% and 90% loan to value (LTV) mortgages have increased by around 60 basis points on average (Chart 1.16, left panel), as increases in reference rates in early September passed through relatively quickly to mortgage rates.

Higher mortgage rates are expected to feed through gradually to the effective rate on the stock of mortgages. By the end of 2029, average annual mortgage payments are projected to be around £700 higher than at the time of the July Report and around £1,500 higher than before the conflict in the Middle East, which would be expected to weigh on household consumption.

Rates on instant access deposits and new bank lending to corporates have remained largely flat since the July Report, as they tend to move more closely with Bank Rate (Chart 1.16, right panel). Corporate bond yields have risen, largely reflecting moves in risk-free rates.

Chart 1.16: Most household and corporate interest rates have tracked reference rates

Household and corporate interest rates and their corresponding reference rates ^(a)

Footnotes

• Sources: Bank of England, Bloomberg Finance L.P. and Bank calculations.
• (a) Household loan and deposit rates are based on average quoted rates and business loan rates are based on average effective rates on new lending. The Bank’s quoted rates series are weighted monthly average rates advertised by all UK banks and building societies with products meeting the specific criteria. Introduction of new Quoted Rates data provides more information. The 75% and 90% LTV mortgage rates are for two-year fixed-rate products. The reference rate for these and fixed-rate savings bonds is the two-year OIS rate. The reference rate for £10,000 personal loan rates is the five-year OIS rate, but this is not shown. The two-year OIS rate shows monthly averages. Household quoted rates data are not seasonally adjusted. The provisional October 2026 data are shown as diamonds. For quoted rate series and the two-year OIS rate, these are based on average values to 27 October 2026. The provisional data point for Bank Rate is based on the rate as of 27 October 2026. The final business loan rate data are for September 2026. ↩

Credit growth has remained robust despite higher interest rates, while broad money growth has been stable.

Net lending has remained relatively strong since the start of the conflict, although there are some signs of weakening credit demand. Real net lending to households and non-financial private corporations in the year to September has been higher than during the same period last year. This suggests that the transmission of higher market rates to borrowing has so far been limited. However, the latest Credit Conditions Survey – 2026 Q3 suggests credit demand from households and small and medium-sized businesses weakened in 2026 Q3, pointing to weaker momentum in near-term credit growth.

Aggregate broad money grew by 4% in the year to September, broadly in line with growth rates in 2025. The ratio of aggregate broad money to nominal GDP remains close to the Bank staff’s estimated equilibrium level. The absence of a materially positive money gap is not currently suggesting additional risks to the activity and inflation outlook. It could also imply a smaller risk of second-round effects from the energy shock (Box E of the July 2026 Monetary Policy Report).

2: Topical policy issues

The boxes in this section highlight some of the key pieces of analysis that informed the MPC’s discussions.

3: Outlook, scenarios and risks

The UK economy continues to face high and volatile global energy prices resulting from conflict in the Middle East; oil and gas prices have risen further in recent weeks. This will lead to inflation rising further above the 2% target in the near term. But there is significant uncertainty around the length of time energy prices will remain elevated, the extent to which high energy prices will generate persistent inflationary pressures, and their impact on demand.

This section presents a central projection that the majority of the MPC agree is a reasonable baseline for the economic outlook, with energy prices conditioned on current futures curves that decline over time. Conditioned on the market path for interest rates, second-round effects are judged likely to occur in this projection, contributing to inflation remaining above the 2% target over much of the forecast period, before declining below it as the impact of rising energy prices on 12-month inflation reverses, and monetary policy lowers inflation. Second-round effects are assumed to contribute, on average, a little over 0.5 percentage points to inflation over the second half of the forecast period. This is around 0.3 percentage points larger than the assessment in the July Report, reflecting the rise in energy prices since then.

The central projection is complemented by two scenarios that explore some of the key risks currently shaping the UK economic outlook. An ‘adverse inflation’ scenario assumes that energy prices are persistently higher than in the central projection and that those are associated with stronger second-round effects. As a result, CPI inflation is persistently above the inflation target, conditioned on the market path for interest rates. A ‘weaker demand’ scenario assumes that energy prices follow the path implied by futures prices and explores the possibility that demand is materially less resilient to elevated energy prices. Weaker demand increases the existing spare capacity in the economy and limits inflationary pressure, with no second-round effects assumed to emerge.

Illustrative policy rules suggest that, in the central projection, a more restrictive monetary policy stance is required than in July to return inflation to the 2% target. Policy rules suggest that the adverse inflation scenario requires a more restrictive stance than the central projection, partly reflecting greater second-round effects. The weaker demand scenario requires a less restrictive stance, as inflation falls below target in the medium term and spare capacity increases.

3.1 Key risks and uncertainties

Energy prices and second-round effects

The UK economy is facing a continued energy price shock, which has worsened since the July Report as prices of oil, gas and many related products have risen materially (Section 1.1). While estimates suggest oil exports from the Middle East have recovered recently and are close to the levels seen following the US-Iran ceasefire in June, a combination of other factors has pushed up oil prices. These include higher transport costs for oil, a risk of intensification of the conflict, and low global oil inventories. Higher oil prices have also pushed up the prices of refined products, for example diesel, which continue to include an elevated crack spread due to a reduction in Middle Eastern and Russian refining capacity. Gas prices have risen by more than oil prices since the July Report (Chart 1.5). The evolution of all these factors is uncertain: energy prices could rise if, for example, conflict in the Middle East worsens but could fall faster than futures curves suggest, for example if there were to be a durable resolution to the conflict.

The impact of higher energy prices on economic activity is uncertain. Higher energy prices could weaken demand by undermining some of the factors that have supported the recent resilience in activity. There is uncertainty around how long households can draw on savings or save less to smooth through the hit to real incomes as energy prices feed through to higher inflation, and to what extent companies can absorb higher costs before their financial resources are depleted.

The impact of higher energy prices on UK inflation is also uncertain, particularly via indirect and second-round effects. There is limited signal from the available data that second-round effects have already started to emerge (Box A). But the MPC continues to judge that the risk of these effects emerging is greater the longer the energy shock persists, for example as a result of greater attentiveness by households and businesses to prices which leads to rising inflation expectations.

Global goods prices

The outlook for non-energy import prices for the UK is another important source of uncertainty about the UK inflation outlook at present. One important known factor is the current El Niño weather event. Agricultural and commodity prices likely incorporate some anticipation of the impact of El Niño, but its impact could prove larger than anticipated or captured by current futures curves, particularly for global food prices (Box B). There is also uncertainty over the outlook for Chinese export prices, which have historically been a source of disinflation for the UK. Chinese export prices have risen over recent months, with increases in the prices of AI-related exports the largest factor. There is a risk that Chinese export prices continue to rise, increasing external inflationary pressure for the UK economy. This risk is balanced by the potential for trade diversion resulting from changes to global tariffs, which could lower Chinese export prices to the UK (Box D of the July 2026 Monetary Policy Report).

There is also a risk of further global negative supply shocks, particularly given their increased frequency in recent years. One pertinent example, which could amplify the effects of El Niño, is a disruption to fertiliser supply. Global fertiliser prices remain above levels typical of the 2010s, although well below the peaks reached in 2022. Disruptions to fertiliser supply, for example if some countries were to impose export restrictions, could raise food prices, with effects that could be persistent. There also remains a risk of more general disruptions to supply chains given broader geopolitical risks, which would also put upward pressure on CPI inflation.

Monetary policy restrictiveness

Although assessments of the degree to which the stance of monetary policy is restrictive or accommodative to the economy vary, overall evidence is consistent with the current stance of monetary policy being restrictive.

Nevertheless, there are several significant uncertainties over the current impact monetary policy is having on the economy. One example is the speed at which past changes in Bank Rate are feeding through to inflation (Box E). If the impact of monetary policy on the economy has been faster than historical norms, increases in Bank Rate between 2021–23 may now be providing less of a drag than some models suggest, which could explain some of the recent resilience in GDP growth.

Another important uncertainty is around the extent to which increases in the market curve for interest rates have resulted in a more restrictive stance of monetary policy. Nominal interest rates have risen, which is feeding through into nominal lending costs. This impact may be larger for households than for some businesses given that household bank lending rates tend to be linked to the market curve whereas corporate bank lending rates often reference Bank Rate.

However, nominal interest rates and measures adjusted for expected inflation – real financial conditions – can give different signals (Mann (2026)). Some measures of real rate gaps, for example those derived from the Bank’s Market Participants Survey, suggest smaller changes in real financial conditions than changes in nominal conditions. These measures are highly uncertain in part because the equilibrium real interest rate r* – the time-varying real interest rate that, if the economy started from a position of no output gap and inflation at target, would sustain output at potential and inflation at target – is not observable and estimates vary.

3.2: Central projection and scenarios

To help explore the span of some of the key risks, the MPC considers a number of projections for the economic outlook. The central projection is based on a staff proposal that the majority of the MPC agrees is a reasonable baseline. This section also sets out two complementary scenarios: an ‘adverse inflation’ scenario and a ‘weaker demand’ scenario. These explore impacts of plausible alternative assumptions for energy prices, demand growth and second-round effects (Table 3.A and Chart 3.1). The central projection and scenarios collectively in this Report represent a broader range of outcomes than the scenarios published in the July Report.

The adverse inflation scenario explores the risk of higher energy prices and the higher second-round effects which might occur as a consequence. The path for energy prices assumed in this scenario is higher than in the analogous adverse scenario in July. This reflects the rise in global energy prices since the July Report and is consistent with persistent disruption to global energy markets.

The weaker demand scenario assumes the same path for future energy prices as the central projection but assumes that GDP growth slows materially and that widening spare capacity in the economy reduces the scope for businesses to raise prices or grant higher pay, such that no second-round effects emerge. This could be consistent with the lack of evidence for second-round effects currently.

Table 3.B sets out how key economic variables evolve across the central projection and scenarios, conditioned on the market curve for interest rates. The fan charts around the central projection in Chart 3.2 continue to be based only on the distribution of historical forecast errors, and do not attempt to represent the skew of risks around the current outlook.

Chart 3.1: Energy price paths are higher in the adverse scenario relative to the central projection and weaker demand scenario

Brent crude oil and natural gas price paths in the central projection, the weaker demand scenario, and the adverse scenario ^(a)

Footnotes

• Sources: Bloomberg Finance L.P., LSEG Workspace and Bank calculations.
• (a) Historical spot prices are monthly averages. For oil, they are Brent crude prices and are in US dollars. For natural gas they are Bloomberg UK NBP Natural Gas Forward prices using the historical evolution of the 12-month ahead natural gas futures price, and are in sterling. The dashed lines refer to the conditioning assumptions for the central projection and the adverse scenarios, as outlined in Table 3.A. The weaker demand scenario uses the same paths for energy as the central projection. The final data are for 2029 Q4. ↩

Chart 3.2: CPI inflation in the central projection is expected to return to the 2% target in 2028. GDP growth falls and then recovers, while the unemployment rate is projected to rise slightly

Annual CPI inflation, GDP growth and unemployment rate ^(a)

Footnotes

• Sources: ONS and Bank calculations.
• (a) The fan charts depict the probability of various outcomes for GDP growth, the International Labour Organization (ILO) definition of unemployment and CPI inflation in the central projection. The uncertainty parameters determining the width of the fan charts have been calibrated to match the historical forecast errors since 2004 and up to 2026 Q2 for each variable at different horizons but exclude errors during the pandemic given its exceptional nature. The fan charts are constructed so that outturns are expected to lie within each pair of lighter areas on 30 occasions, with outturns expected to lie within the fan on 90 out of 100 occasions. On the remaining 10 out of 100 occasions, outturns can fall outside the respective aqua, orange and purple areas of the fan chart, depicted by the blue background. For GDP growth, the distribution reflects uncertainty around past data revisions and future evolution, so that the mature estimate would lie within the darkest central band on only 30 out of 100 occasions. The Committee no longer uses the calibration of the fan chart skew to reflect judgements on the balance of risks to the central projection. ↩

Central projection

In the central projection, conditioned on the market curve for interest rates, CPI inflation is expected to remain well above the 2% target throughout 2027 and the first half of 2028, before returning to the target in 2028 Q3 (Chart 3.3, left panel).

Chart 3.3: Conditioned on the market curve for interest rates, inflation is expected to rise into 2027 before falling back in the second half of 2028

Annual CPI inflation and the contribution of second-round effects to CPI inflation in the central projection and scenarios ^(a)

Footnotes

• Sources: ONS and Bank calculations.
• (a) The central projection and scenarios shown here are conditioned on the same market curve for Bank Rate. Further details on conditioning assumptions can be found in Table 3.A and the Projections Databank accompanying this Report. The final projections are for 2029 Q4. ↩

The projected rise in inflation over the next year is largely accounted for by rising direct and indirect energy effects; thereafter second-round effects become larger (Chart 3.3, right panel). Direct energy effects are the largest contributor to the rise in inflation at the start of the forecast. Indirect effects are now expected to build slightly more slowly but are projected to push up the CPI level by around 1% in mid-2027. Disinflation occurs as downward sloping energy futures curves result in negative direct energy effects on inflation in 2028. A degree of spare capacity in the economy throughout the forecast period reduces inflation and results in inflation falling slightly below target by the end of the forecast. Second-round effects are assumed to build over the forecast period, pushing up inflation throughout, contributing on average 0.5 percentage points to CPI inflation in the second half of the forecast period. These effects materialise in part because households’ inflation expectations rise and workers resist falling real wages, leading to faster nominal wage growth and firms’ passing these costs through to prices. Second-round effects could also be consistent with firms’ price-setting responding to higher inflation expectations.

The inflation projection is materially higher than in July due to the increase in energy prices since then. In the July Report, inflation was expected to rise to 3.2% around the turn of this year before falling back, whereas the latest projection is for inflation to reach around 5% in mid-2027. The higher path of energy prices increases the size of direct and indirect effects and feeds through into larger second-round effects, which are around 0.3 percentage points higher over the second half of the forecast period than in the July projection.

Measures included in Budget 2026 are expected to reduce CPI inflation in the first half of 2027 by around ¼ percentage point before unwinding in 2028 (Box F).

GDP growth is projected to slow in the coming quarters. UK economic activity has been resilient in 2026 but some of the drivers of that resilience are not expected to continue to support GDP growth over the forecast period (Box C). Higher energy prices also reduce GDP growth in 2027 as households face lower real income growth. And this effect is amplified by the observed tightening in financial conditions, including the rise in the market curve for interest rates. Further fiscal consolidation is expected to continue to reduce the level of GDP over the forecast.

The economy is currently assessed to be operating with a degree of spare capacity, with output around 1% below potential in 2026 Q4 (Chart 3.4, right panel). As GDP growth slows, spare capacity is expected to increase slightly. This is accompanied by a small increase in the unemployment rate to 5.1%, and there is no widespread labour market shakeout (Chart 3.4, left panel).

Chart 3.4: Conditioned on the market path for interest rates and announced fiscal policy, excess spare capacity is expected to grow slightly while the unemployment rate rises

Unemployment rate and output gap in the central projection and scenarios ^(a)

Footnotes

• Sources: ONS and Bank calculations.
• (a) The central projection and scenarios shown here are conditioned on the same market curve for Bank Rate. Further details on conditioning assumptions can be found in Table 3.A and the Projections Databank accompanying this Report. The final projections are for 2029 Q4. ↩

Adverse inflation scenario

In the adverse inflation scenario, energy prices rise materially above the paths implied by current futures curves and remain persistently elevated (Chart 3.1). This leads to materially higher inflation in the near term, primarily through the direct and indirect effects of energy prices. Further ahead, strong second-round effects keep inflation persistently above the 2% target, conditioned on market interest rates (Chart 3.3). Direct and indirect effects push up already elevated longer-term inflation expectations and lead to faster nominal wage growth and larger pass-through to firms’ pricing. The second-round effects in this scenario operate through the same channels as in the adverse scenario in the July Report but are larger owing to the higher path for energy prices.

Higher energy prices also reduce GDP growth in the scenario. Energy prices tend to affect demand by more than supply. As a result, there is somewhat more spare capacity in the economy over the forecast period than in the central projection. But this additional spare capacity is assumed not to be sufficient to materially constrain workers’ wage bargaining power or firms’ ability to raise prices.

Weaker demand scenario

In the weaker demand scenario, energy prices follow the same futures curve as in the central projection. The key difference in this scenario is that domestic demand weakens rapidly, so activity is lower than in the central projection. This could occur if households are unable or unwilling to smooth consumption through the real income shock from high energy prices, for example if some households exhaust savings buffers that they have been drawing down to sustain consumption. Or businesses that initially absorbed higher costs may become less able to do so as their financial resources are depleted and as the shock proves more persistent, leading to increased insolvencies, lower employment and weaker investment. Weaker demand results in materially more spare capacity in the economy than in the central projection.

Inflation is lower in the weaker demand scenario than in the central projection. Greater spare capacity limits wage and price pressures, such that no second-round effects emerge. Conditioned on the market path for interest rates, inflation falls below the 2% target during 2028 and reaches 1.2% in 2029.

3.3: Central projection and scenarios under alternative monetary policy stances

The central projection and scenarios described above are conditioned on the market curve for interest rates. If the assumptions underlying any particular projection or scenario came to pass, the appropriate stance of policy would likely vary from that market path.

Illustrative policy rules can provide information about the effects of alternative monetary policy stances for different scenarios. These rules inform the MPC’s assessment, but do not translate mechanically into Bank Rate decisions. Two such policy rules are shown below. One is a contemporaneous Taylor-type rule incorporating the output gap and non-energy inflation. This rule helps to demonstrate a policy path that ‘looks through’ the direct effects of an energy shock, while responding to indirect and second-round effects, which may be informative in the current economic environment. The other is an illustrative model-based projection, which constructs policy paths to minimise a loss function intended to capture policymakers’ preferences over macroeconomic outcomes, including deviations of overall inflation from target, variation in the output gap and changes in interest rates.

The market curve for interest rates includes expectations for future Bank Rate and risk premia (Lengyel and Walker (2026)). The policy rules presented here should be interpreted as exploring alternative overall policy stances, comparable to the stance implied by the market curve, rather than a path for future Bank Rate decisions.

Illustrative policy rules suggest a more restrictive stance for monetary policy is required than in July to return inflation to the 2% target in the central projection.

For the central projection, taken together the two illustrative policy paths are broadly similar to the market curve in the near term, but somewhat lower further out (Chart 3.5). On average, they point to a somewhat looser overall policy stance than implied by the market curve. The non-energy Taylor-type rule is slower to respond than the illustrative model-based projection, reflecting the fact that it excludes the direct effects of energy price changes which account for much of the near-term rise in inflation, and under that stance inflation does not return to the 2% target within the forecast period.

The paths implied by illustrative policy rules vary but have risen since the July Report. The rules associated with the central projection have risen by between 0.6–0.9 percentage points on average over 2027–29, given higher energy prices and the associated higher second-round effects. In part reflecting market participants’ assessment of the impact of the economic news since the July Report, the market curve has risen by around 0.6 percentage points on average over 2027–29.

Chart 3.5: The economic outlook in the central projection requires a restrictive stance of monetary policy albeit illustrative policy paths suggest a somewhat looser policy stance than implied by the market curve is appropriate on average

Central projection under the market curve, staff’s illustrative model-based projections, and a contemporaneous non-energy Taylor-type rule ^(a)

Footnotes

• Sources: Bank of England and Bloomberg Finance L.P.
• (a) The interest rate paths shown are Bank Rate up to 2026 Q2 and subsequently the OIS curve or alternative curves based on policy simulations up to 2029 Q4. The Projections Databank provides additional detail on the definition of the model-based projections and the simple policy rule shown here. These should not be interpreted as a prescription for how policy is likely to evolve. In these simulations, the paths for inflation and the output gap within the forecast period can also be affected by the evolution of policy paths beyond the forecast horizon. ↩

Policy rules suggest that more restrictive monetary policy would be required in the adverse inflation scenario than in the central projection, in part due to greater second-round effects.

Chart 3.6 shows the adverse scenario projections for CPI inflation and the output gap under different paths for monetary policy. The policy paths for the model-based projection and the Taylor-type rule are both higher in the adverse scenario than in the central projection. Relative to the central projection, the model-based policy path is 0.7 percentage points higher on average over the forecast period, partly reflecting its rapid response to the higher near-term inflation peak. The non-energy Taylor-type rule is 0.3 percentage points higher than in the central projection: it responds less to the near-term peak, which is driven by direct energy effects, but still tightens in response to more persistent inflation. As in the central projection, the Taylor-type rule does not return inflation to the 2% target within the forecast period in the adverse inflation scenario.

Chart 3.6: More persistent inflation in the adverse inflation scenario requires a more restrictive monetary policy stance than the market curve

Economic outcomes for the adverse inflation scenario under the market curve, staff’s illustrative model-based projections, and a contemporaneous non-energy Taylor-type rule ^(a)

Footnotes

• Sources: Bank of England and Bloomberg Finance L.P.
• (a) The interest rate paths shown are Bank Rate up to 2026 Q2 and subsequently the OIS curve or alternative curves based on policy simulations up to 2029 Q4. The Projections Databank provides additional detail on the definition of the model-based projections and the simple policy rule shown here. These should not be interpreted as a prescription for how policy is likely to evolve. In these simulations, the paths for inflation and the output gap within the forecast period can also be affected by the evolution of policy paths beyond the forecast horizon. ↩

Policy rules in the weaker demand scenario are lower than their equivalents in the central projection, reflecting inflation falling below target and more spare capacity.

Inflation falls below target in the medium term and there is excess spare capacity in the economy in the weaker demand scenario (Chart 3.7). Both policy rules respond to this with a lower path for rates over the forecast period than in the central projection: the model-based projection is on average 0.5 percentage points lower and the non-energy Taylor-type rule is 0.2 percentage points lower (over 2027–29). Both rules respond to the near-term pickup in inflation with a rising path of rates over coming quarters, albeit by slightly less than in the central projection, but the looser stance of monetary policy under the rules is mostly due to a much lower rate path from 2028 onwards as inflation falls below target and there is substantial spare capacity in the economy.

Chart 3.7: Inflation falling below target and excess spare capacity in the weaker demand scenario suggest monetary policy should be less restrictive

Economic outcomes for the weaker demand scenario under the market curve, staff’s illustrative model-based projections, and a contemporaneous non-energy Taylor-type rule ^(a)

Footnotes

• Sources: Bank of England and Bloomberg Finance L.P.
• (a) The interest rate paths shown are Bank Rate up to 2026 Q2 and subsequently the OIS curve or alternative curves based on policy simulations up to 2029 Q4. The Projections Databank provides additional detail on the definition of the model-based projections and the simple policy rule shown here. These should not be interpreted as a prescription for how policy is likely to evolve. In these simulations, the paths for inflation and the output gap within the forecast period can also be affected by the evolution of policy paths beyond the forecast horizon. ↩

Annexes

• Annex 1: Central projection tables

  This annex provides additional details on the central projection. Further forecast variables are provided in the Projections Databank, available from Monetary Policy Report – Download chart slides and data – November 2026.

  Table A1.A: GDP ^(a)

  	Average 1998–2007	Average 2010–19	2026	2027	2028	2029
  World GDP (UK-weighted) (b)	3.1	2.5	2.2 (1.9)	2.0 (2.2)	2.1 (2.3)	2.2
  UK GDP (c)	2.8	2.1	1.6 (1.1)	1.3 (1.1)	1.2 (1.7)	1.5
  Household consumption (d)	3.1	2.2	1.2 (1.0)	0.5 (0.8)	1.1 (1.8)	1.4
  Real post-tax labour income (e)	3.3	1.6	-0.1 (0.1)	-0.6 (0.5)	1.0 (1.1)	1.0
  Household saving ratio (f)	7.5	8.4	8.0 (8.8)	7.3 (8.4)	7.3 (7.9)	6.9
  Business investment (g)	3.5	4.5	4.3 (-1.5)	2.5 (0.9)	1.8 (1.5)	2.3
  Housing investment (h)	3.7	3.7	0.1 (0.2)	-1.9 (1.5)	0.4 (6.6)	3.2
  Government expenditure (i)	3.7	1.0	2.9 (3.5)	0.9 (2.1)	0.7 (1.0)	0.8
  Exports (j)	4.2	3.6	3.6 (2.4)	2.9 (2.7)	1.8 (2.3)	2.5
  Imports (k)	5.8	4.1	2.8 (2.3)	1.9 (2.0)	1.2 (2.5)	2.4
  Excess supply/Excess demand (l)	0.0	-1.7	-1.0 (-1.1)	-1.1 (-1.1)	-1.3 (-0.8)	-1.2

  Footnotes

  • (a) Figures show annual growth rates (excluding ‘Excess supply/Excess demand’) and are chained volume measures. Figures in parentheses show the corresponding projections from the July 2026 Monetary Policy Report. ↩
  • (b) Constructed using real GDP growth rates of 188 countries weighted according to their shares in UK exports. ↩
  • (c) Based on ONS series ABMI. ↩
  • (d) Includes non-profit institutions serving households. Based on ONS series ABJR+HAYO. ↩
  • (e) Wages and salaries plus mixed income and general government benefits less income taxes and employees’ National Insurance contributions, deflated by the consumer expenditure deflator. Based on ONS series using this formula: [ROYJ+ROYH-(RPHS+AIIH-CEAN)+GZSL]/[(ABJQ+HAYE)/(ABJR+HAYO)], where the series AIIH, CEAN and GZSL have been seasonally adjusted. Some changes between Reports reflect official revisions to past data. ↩
  • (f) Percentage of total available household resources. Based on ONS series NRJS. ↩
  • (g) Based on ONS series GAN8. ↩
  • (h) Whole-economy measure. Includes new dwellings, improvements and spending on services associated with the sale and purchase of property. Based on ONS series DFEG+L635+L637. ↩
  • (i) Based on ONS series NMRY+G93X. ↩
  • (j) The historical data exclude the impact of missing trader intra‑community (MTIC) fraud. Since 1998 based on ONS series IKBK-OFNN/(BOKH/BQKO). ↩
  • (k) The historical data exclude the impact of MTIC fraud. Since 1998 based on ONS series IKBL-OFNN/(BOKH/BQKO). ↩
  • (l) Annual average level. Per cent of potential GDP. A negative figure implies output is below potential and a positive figure that it is above. ↩

  Table A1.B: Wages and prices ^(a)

  	Average 1998–2007	Average 2010–19	2026 Q4	2027 Q4	2028 Q4	2029 Q4
  Private sector regular average weekly earnings (b)	4.1	2.2	3.2 (3.0)	3.5 (3.1)	3.4 (3.1)	3.1
  Private sector regular pay-based unit wage costs (c)	1.9	1.5	2.1 (3.2)	2.4 (2.1)	2.4 (1.9)	2.0
  UK import prices (d)	-0.4	1.3	1.9 (0.8)	1.5 (0.6)	0.1 (0.4)	0.1
  CPI (e)	1.6	2.2	3.8 (3.2)	4.0 (2.1)	2.0 (1.9)	1.8
  Energy prices – direct contribution to CPI inflation (f)	0.3	0.2	1.1 (0.4)	0.3 (-0.1)	-0.5 (-0.2)	0.0

  Footnotes

  • (a) Four-quarter growth in Q4 (except for Energy prices – direct contribution to CPI inflation). Figures in parentheses show the corresponding projections from the July 2026 Monetary Policy Report. ↩
  • (b) Private sector average weekly earnings excluding bonuses and arrears of pay. Based on ONS series KAJ2. ↩
  • (c) Private sector wage costs divided by private sector output at constant prices. Private sector wage costs are AWE (excluding bonuses) multiplied by private sector employment. ↩
  • (d) Excludes fuel and the impact of MTIC fraud. ↩
  • (e) Based on ONS series D7BT. ↩
  • (f) Contribution of fuels and lubricants and gas and electricity prices to four-quarter CPI inflation. ↩

  Table A1.C: The labour market ^(a)

  	Average 1998–2007	Average 2010–19	2026	2027	2028	2029
  Labour productivity output per worker (b)	1.8	0.9	0.4 (0.1)	0.7 (0.7)	0.8 (1.0)	0.8
  Employment (c)	1.0	1.2	1.1 (1.0)	0.7 (0.4)	0.3 (0.6)	0.7
  Working-age (16+) population (d)	0.7	0.7	0.9 (0.9)	0.7 (0.7)	0.7 (0.7)	0.6
  Participation rate (e)	63.0	63.5	63.9 (63.9)	63.9 (63.9)	63.8 (63.9)	63.8
  Unemployment rate (f)	5.3	6.0	4.8 (5.0)	4.9 (5.3)	5.1 (5.2)	5.0
  Average hours (g)	32.4	31.9	31.9 (31.8)	31.8 (31.7)	31.7 (31.7)	31.7

  Footnotes

  • (a) Figures in parentheses show the corresponding projections from the July 2026 Monetary Policy Report. ↩
  • (b) Annual average level. Real GDP divided by total 16+ employment. Based on ONS series ABMI/MGRZ. ↩
  • (c) Annual average growth rate. Based on ONS series MGRZ. ↩
  • (d) Annual average growth rate. LFS household population, all aged 16 and over. ↩
  • (e) Annual average level. ILO definition of labour force participation as a percentage of the 16+ population. Based on ONS series MGWG. ↩
  • (f) Annual average level. ILO definition of unemployment rate. Based on ONS series MGSX. ↩
  • (g) Annual average level. ↩

• Annex 2: Monetary policy since the July 2026 Report

  At its meeting ending on 16 September 2026, the Monetary Policy Committee (MPC) voted to maintain Bank Rate at 3.75%.

  Protracted conflict in the Middle East had contributed to further increases in crude and refined energy prices since the previous meeting, which remained more volatile and higher than pre-conflict. UK CPI inflation had increased to 3.1% in August and was likely to rise further over coming quarters. Monetary policy was being set to ensure inflation came down to 2% sustainably as the economy adjusts to the energy shock. The policy stance required to achieve this would depend on the scale and duration of the shock and how it propagated through the economy.

  There had been little evidence of material second-round effects in price and wage-setting. However, the risk of such effects, against which policy needed to lean, was greater the longer higher energy prices persist or were more volatile. Activity had been slightly stronger than expected, although soft labour market conditions, and the higher interest rates faced by households and businesses since the conflict began, would act to reduce inflation over time. Overall, the Committee judged that the risks to the inflation outlook were tilted to the upside, and more so than at the time of the July Monetary Policy Report, although there remained scope for the outlook to change materially as events in the Middle East unfolded.

  The Committee judged that it was appropriate to maintain Bank Rate at its September meeting. The Committee stood ready to act as necessary to ensure that CPI inflation remained on track to meet the 2% target in the medium term.

  At this meeting, the MPC also voted unanimously to reduce the stock of UK government bond purchases held for monetary policy purposes, and financed by the issuance of central bank reserves, to zero. This would be conducted through a multi-year plan, such that the remaining stock would be unwound at an annual average pace of £46 billion by the end of 2034, through annual sales of £20 billion alongside maturing gilts.

Glossary and other information

• Glossary of selected data and instruments

  ASBC – Agents’ summary of business conditions.

  AWE – average weekly earnings.

  CPI – consumer prices index.

  CPI inflation – inflation measured by the consumer prices index.

  DMP – Decision Maker Panel.

  GDP – gross domestic product.

  LFS – Labour Force Survey.

  MaPS – Market Participants Survey.

  OIS – overnight index swap.

  PMI – purchasing managers’ index.

  PPI – producer price index.

• Abbreviations

  AI – artificial intelligence.

  BCC – British Chambers of Commerce.

  CBI – Confederation of British Industry.

  DESNZ – Department for Energy Security and Net Zero.

  ECB – European Central Bank.

  G7 – Group of Seven.

  GfK – Gesellschaft für Konsumforschung, Great Britain Ltd.

  HMRC – His Majesty’s Revenue and Customs.

  IMF – International Monetary Fund.

  KPMG – Klynveld Peat Marwick Goerdeler.

  LLM – Large Language Model.

  LNG – liquefied natural gas.

  LSEG – London Stock Exchange Group.

  LTV – loan to value.

  MIDAS – mixed-data sampling.

  MPC – Monetary Policy Committee.

  NBP – National Balancing Point.

  NICs – National Insurance contributions.

  NLW – National Living Wage.

  NOAA – National Oceanic and Atmospheric Administration.

  NWE – Northwest Europe.

  OECD – The Organisation for Economic Co-operation and Developments.

  Ofgem – Office of Gas and Electricity Markets.

  ONS – Office for National Statistics.

  REC – Recruitment and Employment Confederation.

  RICS – Royal Institute of Chartered Surveyors.

  RTI – Real-Time Information.

  SET-BVAR – Self-exciting threshold Bayesian vector autoregression.

  SIC – Standard Industrial Classification.

  S&P – Standard & Poor’s.

  UK – United Kingdom of Great Britain and Northern Ireland.

  US – United States of America.

  VAT – Value added tax.

  V/U – vacancies to unemployment.

  WFJ – Workforce Jobs.

• Symbols and conventions

  Except where otherwise stated, the source of the data used in charts and tables is the Bank of England or the Office for National Statistics (ONS) and all data, apart from financial markets data and results from the Decision Maker Panel (DMP) survey, are seasonally adjusted.

  n.a. = not available.

  Because of rounding, the sum of the separate items may sometimes differ from the total shown.

  On the horizontal axes of graphs, larger ticks denote the first observation within the relevant period, eg data for the first quarter of the year.