The Bank of England has raised Bank Rate to 4% and several of its policymakers expect to go further. For councils, that lands on borrowing, the Housing Revenue Account and temporary accommodation all at once. Most medium-term plans were not built for it.
On 5 November the Bank of England published its decision to raise Bank Rate from 3.75% to 4%. The Monetary Policy Committee voted eight to one. The one dissenter wanted a bigger rise, to 4.25%.
For several years, council treasury strategies have been written on the assumption that rates had peaked and would drift down. That assumption has just been tested, and it may not survive the winter.
What the Bank actually said
The driver is energy. The Bank's summary points to the conflict in the Middle East, now in its ninth month, pushing up oil and gas prices. UK gas futures were 81% above their level at the time of the July forecast.
ONS figures published on 21 October show CPI inflation rose to 3.5% in the year to September, up from 3.1% in August. RPI was 3.9%.
And it is expected to get worse before it gets better. Bank staff expect CPI to reach around 5% in the second quarter of 2027.
The guidance matters as much as the decision. The minutes record that several members think further increases are likely in the near term. Others were more cautious, and the Committee stresses there is no pre-set path. The next decision is due on 17 December.
Nobody should treat a further rise as certain. But no Section 151 officer should treat it as unlikely either.
Why gilts matter more than Bank Rate
Councils do not borrow at Bank Rate. PWLB fixed rates are set from gilt yields, and gilt yields rose after the announcement as markets priced in the prospect of more to come.
The Debt Management Office's July 2026 technical note sets out the margins. The PWLB standard rate is gilts plus 100 basis points. The certainty rate is gilts plus 80. The HRA rate is gilts plus 40.
So every move in the gilt curve feeds straight through to the cost of every new loan, and of every loan you have been deferring.
That last point is the one that worries me. Many councils have kept external borrowing down by using cash balances instead, known as internal borrowing. It has been a sensible, cheaper strategy. But it is a timing bet. When reserves are needed, or cash runs down, that borrowing has to be taken externally, at whatever rate applies on the day.
The HRA: more rent, but not a free lunch
There is some good news for landlords. Under the government's policy statement on rents for social housing, increases are limited to CPI as at the previous September plus one percentage point, for at least ten years.
With September CPI at 3.5%, that points to 4.5% for 2027-28.
And 2027-28 is also the first year of rent convergence. Where a Social Rent home is still below formula rent after that increase, the policy statement allows a further £1 a week. From 2028-29 that rises to £2 a week. Convergence stops once a rent reaches formula rent.
For councils this is not a marginal issue. The government's convergence consultation found that in 2024, 99.9% of local authority Social Rent homes were below formula rent, against 61.3% for private registered providers.
So for most council landlords, the real ceiling next April is 4.5% plus up to £1 a week, and more the year after. Every HRA business plan should now model both, and members should take an explicit decision on whether to apply convergence, because the income forgone compounds over the life of the plan.
But costs are rising too. Repairs, energy, pay and contractor costs are not capped at CPI plus one.
For HRAs with new build or acquisition programmes still to be financed, the interest line in the 30-year plan is now the variable most likely to be wrong.
I would not cut a programme on the back of one rate decision. I would re-run the plan at higher rates, with convergence built in, and see where the headroom goes.
Temporary accommodation: inflation in, frozen subsidy out
Here the squeeze is sharpest. Councils in England spent a record £2.9bn on temporary accommodation in 2025-26, up from £2.8bn the year before, according to figures reported by Scottish Housing News in September.
Nightly paid rates, lease rents and acquisition prices all respond to inflation. Subsidy does not. As the Local Government Association has set out, housing benefit subsidy for most temporary accommodation is capped at 90% of Local Housing Allowance rates as they stood in January 2011.
So every point of inflation widens the gap, and that gap falls on the general fund.
This is also where long-term funding structures come under scrutiny. I have worked on two at Westminster: a 42-year institutional funding deal for 368 homes, and a £50m, 40-year index-linked sale-and-leaseback of 124 temporary accommodation properties with the City of Westminster Pension Fund.
Structures like these can be the right answer. They replace nightly paid costs with something stable and owned. But when inflation jumps, the indexation clause matters as much as the headline yield. Caps, collars and the choice of index are where value is won or lost over 40 years.
Councils negotiating such deals now should model a 5% inflation year, not just a 2% one, and be sure they can live with it.
What this means for councils
None of this calls for panic. It calls for a refresh, before budgets are locked down for 2027-28.
- Re-run the MTFP at higher rates. Test interest costs against a scenario where Bank Rate rises again, not just the central case in your treasury adviser's last forecast.
- Revisit the internal borrowing position. Know how much borrowing you will need to externalise, when, and what a higher rate does to the revenue budget and to MRP-funded schemes.
- Update the HRA business plan. Model the 4.5% increase and the £1 then £2 convergence uplift, take a clear member decision on convergence, and stress test costs and interest at the same time.
- Check indexation in temporary accommodation contracts. Leases, block bookings and long-term funding deals should all be reviewed for how they behave at 5% inflation.
- Keep making the case on subsidy. A cap set in 2011 cannot keep pace with prices in 2027. Members and MPs need to see the numbers.
If you would like an independent view on your borrowing strategy, HRA plan or temporary accommodation funding, get in touch.
Sources
Bank of England, Monetary Policy Summary and minutes, November 2026; ONS, Consumer price inflation, UK: September 2026; DMO, technical note on PWLB lending rate methodology, July 2026; MarketScreener, UK bond yields rise after BoE hikes rates; MHCLG, Policy statement on rents for social housing; MHCLG, How to implement Social Rent convergence (consultation); Scottish Housing News, Council spend on temporary accommodation reaches record £2.9bn; LGA, £3bn temporary accommodation funding black hole.