UK businesses are facing another difficult stretch as persistently high energy prices put fresh pressure on inflation and raise questions over the future path of interest rates.

Bank of England Governor Andrew Bailey said on 25 September that it would become harder for the central bank to keep interest rates unchanged if energy prices remain elevated for an extended period. His comments marked another warning that the recent energy shock could feed into broader inflation pressures.

The Bank of England currently has its Bank Rate at 3.75%, after holding it at its September meeting. The decision was not unanimous, with six members voting to keep rates unchanged and three voting for an increase to 4%. UK inflation had reached 3.1% in August, above the Bank's 2% target.

For businesses, the concern goes beyond energy bills themselves. Higher energy prices can feed into transportation, manufacturing, materials and other operating costs. Companies then face a difficult choice between absorbing those increases, passing them on to customers or finding savings elsewhere.

The Bank's own business intelligence shows that input costs and consumer prices are continuing to rise, with energy-intensive businesses particularly exposed. Some manufacturers are reporting double-digit increases in the cost of materials including plastics, fertiliser, petrochemical products and some metals.

There are signs that companies are adapting. The Bank's business contacts reported that manufacturers and warehouse operators are looking at automation following recent labour cost increases. Some businesses are also investing in renewable energy generation as persistent energy prices make reducing dependence on the grid more attractive. Business services firms are increasing spending on technology, including AI.

However, demand remains uneven. The Bank reported weakness across parts of the consumer-facing economy, while construction and property businesses remain among the sectors least likely to be investing. Smaller exporters are also dealing with concerns around tariffs, competition from China and higher shipping and input costs.

The next Bank of England rate decision is scheduled for 5 November. Bailey has stressed that a rate increase is not predetermined, but the longer energy prices remain high, the more difficult it becomes for policymakers to ignore the potential impact on inflation expectations.

For founders and business owners, the immediate issue is managing costs while keeping enough room to invest and grow. Energy exposure, borrowing requirements, pricing power and efficiency are becoming increasingly important when planning the months ahead.

How are higher energy and borrowing costs affecting your business decisions right now?

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