Monetary Policy Report - November 2026

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.

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).

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.

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).

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.

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.

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.

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.

… 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.

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. 

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.

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.

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.

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.

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.

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).

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