UK Interest Rate Hike Expected as Services Sector Growth Accelerates 2026

The Bank of England is expected to raise UK interest rates on Thursday after a closely watched survey showed growth across the UK’s services sector leapt last month to an eight-month high, bolstered by spending on artificial intelligence. The S&P Global survey of the services sector in October showed businesses regained much of the momentum they lost after the start of the Iran war, but also felt the impact of a renewed spurt of input price inflation, which accelerated to a five-month high.

Officials at the Bank have become concerned about inflation after the consumer prices index (CPI) rose from 3.1% in August to 3.5% in September. While the nine-member monetary policy committee (MPC), which sets interest rates, has been split in recent months, a majority is expected to vote on Thursday for a 0.25 percentage point increase to 4%.

Why the Services Sector Surge Matters for Interest Rates

The services sector is the largest part of the UK economy, and its acceleration to an eight-month high signals that demand remains robust despite higher borrowing costs. The survey showed that businesses are investing in artificial intelligence, which is driving spending and adding to inflationary pressures.

Tim Moore, economics director at S&P Global Market Intelligence, said a survey of the manufacturing sector earlier this week also showed businesses facing strong price pressures. He said: “These signals underscore the near-certainty of a Bank of England rate hike in November and collectively raise the likelihood of further Bank of England policy tightening into 2027.”

Financial markets expect three further increases in the cost of borrowing, although most City economists believe inflation is likely to peak in the spring of next year, allowing the Bank to pause its tightening cycle.

Key Takeaways for Businesses and Consumers

• Rate hike likely: A 0.25 percentage point increase to 4% is expected on Thursday.
• Inflation pressures: Input price inflation hit a five-month high, driven by services sector activity.
• AI spending boost: Investment in artificial intelligence is contributing to economic growth and price pressures.
• Future tightening: Markets anticipate three more rate rises, though economists see inflation peaking next spring.
• Split MPC: The committee remains divided, but a majority is expected to vote for higher rates.

How Higher Rates Could Affect Different Sectors

Higher interest rates will increase borrowing costs for businesses and consumers, potentially slowing spending in rate-sensitive sectors such as hospitality and retail. However, the services sector’s momentum suggests the economy can absorb further tightening for now.

The Bank of England’s decision will also influence business rate valuations, which are already under scrutiny for fairness. Pubs and hotels, for example, have long argued that business rates are disproportionately high, and higher interest rates could add to their financial burden.

What to Watch Next

The Bank of England’s decision on Thursday will be accompanied by its latest economic forecasts, which could signal how high rates might go. Investors will also watch for any dissenting votes within the MPC, as a unanimous vote would strengthen the case for further tightening. The background to this story is set out in Bank of England Holds Rates at 3.75% Amid Inflation Fears. A related thread runs through Bank of England Interest Rate Decision: Inflation Hits 3.1%. Earlier coverage in Bank of England Holds Rates at 3.75% as Inflation Fears Mount shows how the argument developed.

Meanwhile, the hospitality sector continues to call for government support. Spain’s hospitality sector has urged the next government to regulate supermarket pricing, a move that could have implications for UK businesses facing similar pressures. In the UK, business rate valuations are being reassessed to ensure fairness for pubs and hotels, which may provide some relief amid rising interest rates. A closer look at the same subject appears in Middle East Crisis Keeps UK Interest Rates High. Anyone following the wider picture can start with Bank of England Independence: Time to End. The same theme surfaces in Rising Oil Prices Could Force UK Interest Rates Up, which takes a different angle.

As the Bank of England navigates these competing pressures, businesses should prepare for higher borrowing costs and plan accordingly. The interplay between interest rates, inflation, and sector-specific challenges will shape the economic landscape well into 2027. Context on how this played out before sits in Rising Oil Prices Could Force UK Interest Rates Higher. A companion piece, UK Interest Rates Hold at 3.75%: Middle East Crisis Keeps, approaches the same subject from another angle.