28 September 2026: MPs review Bank of England monetary policy independence

Bank of England Governor Andrew Bailey warned on Friday that sustained high energy costs will put immense pressure on the Monetary Policy Committee to abandon, or at least defer, its current wait-and-see stance and consider lifting borrowing costs at upcoming meetings.

"It's going to get harder to maintain that stance the longer we have high energy prices for," Bailey told a Monetary Economics Conference hosted by the University of Oxford. "We can't, as monetary policymakers, wait to get the full evidence on the second-round effects to make that call because it's going to be too late."

Bailey was perhaps hinting that the MPC should abandon its reactive stance in favour of a more proactive approach. The three recent dissenters will likely approve of that tactic.

The comments come as UK bond yields sit at multi-decade highs, with the two-year bond yield, closely tied to Bank Rate expectations, at 4.86%. Expectations for a higher Base Rate feed into longer-dated bonds, with the mortgage-relevant 5-year bond at 4.94%, having reached its highest level in 18 years earlier this month at 5.35%. Money market pricing, per overnight swap markets, shows traders are now positioned for four to five quarter-point (25 bps) rate hikes over the next year.

Bailey and Deputy Governor Dave Ramsden both raised the possibility of higher rates in the latest meeting minutes, even though they voted to hold. Deputy Governors Lombardelli and Breeden used speeches last week to signal they are also close to voting for higher rates.

"The more significant the shock, the more likely it is that we'll see the material second-round effects that policy needs to respond to," said Breeden, who added that it would be "increasingly appropriate" to respond by raising interest rates. Lombardelli set out four channels through which the energy shock could reach inflation and said she would vote to hike at some point unless energy prices fall sharply or there is clear evidence of disinflation and weaker activity.

The Labour government, led by Andy Burnham, is preparing to unveil its economic vision at the Party’s annual conference this week.

The move aims to restore confidence in the British economy amid pressures from rising inflation and energy costs. The September inflation data will be published three weeks from Wednesday, giving the Bank of England ample time to assess its implications before its next rate-setting meeting on November 5th.

The Prime Minister’s speech is expected to pave the way for the launch of a ten-year strategic economic plan in December. The government will also focus on boosting regional development and re-industrialisation.

The government is seeking to bolster the role of regions outside London in economic activity. This is reflected in the creation of a second executive office for the Prime Minister in Manchester, dubbed “10 Downing Street North”.

While Burnham’s plans border on the radical, the measures will take considerable time to take effect. It is unclear whether Chancellor John Healey will have enough fiscal headroom in his upcoming budget to provide the level of support backbench Labour MPs are calling for, particularly for lower-paid workers.

It is rumoured that Burnham is considering abolishing the ‘triple lock’ on the state pension and using the money saved to create a national Social Care Service similar to the NHS, free at the point of use.

The Parliamentary Treasury Select Committee has begun an inquiry into the Bank of England to determine whether its monetary policy independence is “still fit for purpose”.

The Bank was made autonomous over monetary policy in 1997, initially managing benchmark interest rates before expanding into quantitative easing and tightening programmes from 2009 onward.

Although consumer price index inflation moderated to an average of 2.5% post-independence, down from 7.3% between 1967 and 1997, the country now faces a substantially larger national debt burden, and inflation has exceeded official targets for most of the past five years.

The Committee will need to consider whether global inflation levels have ‘tied the MPS’s hands’ to a greater extent, with the Fed facing similarly high inflation, even as the ECB has been more proactive in raising (or cutting) interest rates more regularly.

In light of these shifts, MPs are assessing whether the Bank’s autonomy still works and whether changes are needed to ensure its remit meets the economy’s needs.

The evaluation covers the tangible effects of autonomous policy in curbing price rises and bolstering macroeconomic credibility, while comparing domestic strategies with those of overseas counterparts.

Lawmakers will also examine whether past conduct by either the Bank or the government has raised any conflict regarding operational separation.

Sterling weakened across most major FX pairs, driven primarily by a broad USD surge, higher global bond yields, and widening rate differentials that favoured the dollar. The pound showed brief pockets of stability but remained under pressure throughout the week.

The Trump administration is set to release new fuel-efficiency mandates later today that would weaken the stringent rules implemented under President Biden.

President Trump pitched the changes as a way to boost the domestic auto industry and lower consumer costs. He announced them alongside several auto executives.

“These new Standards will take the waste out of building cars in America,” Trump said in a social media post on Saturday. “That means LOWER PRICES, saving families thousands on a new, beautiful, and safe car, far better than the Environmental Monsters that we were building heretofore.”

Trump has long criticised the Biden-era rules, part of a set of policies meant to spur production and purchases of electric vehicles. EV production and sales have plummeted as a consequence of Trump administration policies, and the new changes also come as higher fuel prices send ripples through the broader U.S. economy.

The automotive sector, which has formed the backbone of American industry for fifty years, risks being completely overwhelmed by Chinese production of both petrol vehicles and EVs, particularly since they appear to have solved reliability issues while competing on ‘style’ with U.S. and European manufacturers.

Trump, whose party is struggling in the polls ahead of the November midterm elections, has been under pressure to do more to address concerns about rising prices for consumer goods, particularly as oil prices have remained persistently high since the start of the Iran war.

He has also renewed his attacks on the Federal Reserve after it recently hiked its benchmark interest rate. Still, economists say the Fed matters less than broader economic trends for longer-term borrowing costs.

The economy is growing steadily despite repeated shocks and may even be accelerating, while inflation remains stubbornly high, as it has been for a considerable time. Big tech firms are borrowing huge amounts of cash to plough into data centre construction, while the Federal Government is still running large annual budget deficits. All these trends point to higher interest rates irrespective of what the Fed does, analysts say.

As a result, the low-interest-rate, low-inflation world that lasted for nearly 15 years after the Great Recession is over, and a higher-priced, higher-rate world is taking its place. Mortgage rates fell into the 3% range in the 2010s and even lower during COVID-19, but such deals are long gone. The average 30-year mortgage rate reached 6.95% last week, the highest in more than a year and a half.

A big reason for the change is the shift from the pre-pandemic economy, when consumer and business demand was weak, to the current economy, where healthy consumer and business spending is colliding with supply shocks and bottlenecks. In addition to higher oil and gas prices because of the Iran war, the AI buildout has struggled with an insufficient supply of computer chips, electronic equipment and workers to put it all together.

The economy has undergone a structural transformation. The regime change in inflation and interest rates is the outcome.

The coming week is packed with key U.S. macroeconomic releases, highlighted by a heavy concentration of labour market data culminating in Friday's September Non-Farm Payrolls report. Investors will also be tracking manufacturing health, consumer sentiment, and inflation indicators.

Today, the Dallas Fed Manufacturing Index for September will be released, followed tomorrow by the Case/Shiller home price index, JOLTS job openings, and Consumer Confidence.

On Wednesday, the Fed’s preferred inflation index, Personal Consumption Expenditures, will be released, along with the ADP Employment change numbers.

ISM Manufacturing data is due on Thursday, followed by the September Non-Farm Payrolls on Friday. Early indications put new jobs created at around +100.

The dollar was broadly stronger across global FX markets last week, supported by the Fed’s first rate hike since 2023, widening yield differentials, geopolitical risk premiums, and tight trading ranges across G10 currencies. Across all major pairs, the USD held firm and pushed several crosses towards multi-week or multi-month lows.

Analysts believe investors may be pricing in too much tightening from the European Central Bank, arguing that a temporary inflation spike caused by higher energy prices is unlikely to generate the persistent wage pressures needed to keep interest rates high.

Several economists expect the ECB to raise its deposit rate again in December, taking it to 2.75% from 2.5%, but see little need for further tightening after that. That view is being challenged by the ECB’s Chief Economist, Philip Lane, who has warned of significant secondary effects from a continuing oil shock.

Recent developments in Tehran and Washington appear to support his view.

The ECB is being watched more closely than ever. After raising interest rates in June for the first time in three years, it followed with another hike in September.

Even if the Bank leaves rates on hold next month, that meeting will still be one of the year's most closely watched economic events, as it will, in effect, fire the starting gun on a round of negotiations that will see three top positions at the Frankfurt-based institution change hands.

The ECB said on Thursday that Isabel Schnabel, Head of the Bank’s Market Operations, will leave her post a year early to take a senior role at the IMF. In addition, Christine Lagarde’s term as President ends in October 2027 amid continued speculation she may leave early, while its Irish chief economist, Philip Lane, a former Central Bank of Ireland Governor, is due to finish his term in May.

The reality of these supranational jobs is that they are as much political as economic, amid jockeying and negotiations between countries to find acceptable candidates.

While discussions will take place within the Governing Council, the decisions will be made in Frankfurt, Paris, Madrid and Amsterdam. Schnabel’s role, a hybrid straddling day-to-day operations and policy, will likely go to a technocrat, while Lane’s position will go to a Governor of one of the Central Banks that make up the ECB’s Governing Council.

This leaves the ‘Lagarde’ role. The ECB is crying out for another ‘Mario Draghi’, with former Dutch Central Bank Head Klaas Knot the favourite, and Spaniard Pablo Hernández de Cos as his most likely challenger.

The departure of Schnabel and Lane will remove two of the more verbose and hawkish voices from the ECB, which could lead to a more ‘dovish’ outlook while the new appointments ‘find their feet'.

Schnabel, in particular, has been a significant hawk during her time with the Bank.

The Euro weakened across global FX markets last week, pressured by a strong US dollar, widening transatlantic yield differentials, and soft European macro sentiment. EUR/USD traded near seven-week lows, repeatedly failing to break above key resistance levels and under sustained bearish pressure throughout the week.

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