The governor of the Bank of England, Andrew Bailey, has indicated that maintaining current interest rates is becoming increasingly difficult amid rising energy costs, signaling potential rate hikes that could push mortgage rates toward 6 percent. His remarks come as the Monetary Policy Committee (MPC) prepares for its next meeting, with market expectations mounting for an increase from the current 3.75 percent to 4 percent.

Earlier this year, the Bank of England stood apart from other major central banks, including the US Federal Reserve and the European Central Bank, by holding rates steady despite ongoing inflation concerns. However, dissent within the MPC has grown, with last week’s vote to keep rates unchanged resulting in a narrow 6-3 majority, as three members favored an immediate rise.

The committee is grappling with the consequences of a forecasted 24 percent surge in energy bills set to take effect in January, which could elevate inflation above 4 percent. Added to this are sustained high oil prices—averaging over $100 per barrel since the outbreak of conflict involving Iran, up from roughly $72 before hostilities began. This increase has contributed to near-record prices for petrol and diesel, as well as rising household energy expenses.

Addressing an economics conference in Oxford, Bailey acknowledged that so far the impact of higher energy costs on the broader economy has been limited, but warned that the Bank might need to respond with tighter monetary policy if inflationary pressures intensify. His assessment was supported by Clare Lombardelli, a deputy governor at the Bank, who suggested that continued elevated energy prices would likely necessitate further policy tightening.

The prospect of higher interest rates raises concerns about the affordability of home loans for millions of borrowers. Data from financial information provider Moneyfacts shows a marked increase in mortgage costs in recent weeks. The cheapest two-year fixed-rate mortgage has risen from 3.51 percent before the Iran conflict to 4.75 percent most recently. Meanwhile, the average two-year fixed rate increased from 4.83 percent to 5.92 percent, and a typical five-year fixed mortgage climbed from 4.95 percent to 5.94 percent.

Market investors are pricing in a series of rate hikes, anticipating at least one increase in November followed by three more by the end of 2027, which could push benchmark rates to 4.75 percent from today’s 3.75 percent. Adam French, head of consumer finance at Moneyfacts, remarked that the mortgage market has largely reflected these expectations, with average fixed rates approaching 6 percent—a level that places significant financial strain on borrowers.

Overall, the Bank of England faces a delicate balance between supporting economic growth and curbing inflationary pressures amid ongoing geopolitical tensions and soaring energy prices.