The Bank of England is expected to hold UK interest rates steady on Thursday, despite inflation rising to 3.1% in August, as policymakers weigh a cost-of-living squeeze against a weakening labour market. Money markets currently put an 80% probability on rates staying at 3.75%, with only a 20% chance of a rise to 4%, even though the Bank's remit targets 2% inflation over the medium term. Economists suggest the Bank has enough cover to hold this week, but warn that further increases may become necessary if energy costs keep pushing prices higher into next year.

Analysts note that the current inflation pressure remains largely confined to energy, with little sign yet of it spreading through the wider basket: food inflation actually eased to 1.1% year-on-year in August, and energy-intensive goods and services have not seen accelerating price rises. However, RSM UK's Thomas Pugh cautions that services inflation held at 3.4% and expects overall inflation to climb to around 4% by early next year as higher oil and agricultural prices feed through, with a return to the 2% target unlikely before 2028.