Andrew Bailey warns energy costs are squeezing business margins

Bank of England governor Andrew Bailey has warned that businesses are sacrificing profit margins and cutting costs to avoid passing higher energy bills to customers, as pressure builds ahead of November’s interest rate decision.

Speaking at an International Monetary Fund event in Bangkok, Bailey said prolonged energy price pressures would make that approach increasingly difficult. His comments were reported by City AM.

What happened

International oil and gas prices have climbed over the past fortnight as conflict in the Middle East continues. Businesses are trying to absorb the increase rather than raise the prices of their own goods and services.

Bailey’s discussions with firms point to two responses: accepting lower margins and finding savings elsewhere in their operations. However, the room for further reductions is shrinking, leaving companies with fewer ways to offset higher bills.

The pressure extends beyond energy purchased directly for premises and production. A separate MoneySuperMarket assessment puts the annual rise in van fuel costs at £671, illustrating another cost facing businesses that rely on vehicles.

The background

The Bank’s nine-member Monetary Policy Committee is due to decide whether to increase interest rates in the first week of November, days after the Chancellor’s maiden Budget. Committee members have signalled growing concern that business costs could feed through into consumer prices.

At its previous meeting, the committee voted 6–3 to leave the base rate at 3.75%. Its main forecast puts inflation above 4% in the opening months of 2027.

Households also face a further energy bill increase. Prices are expected to rise by at least 16% in January from the October level, taking Ofgem’s annualised price cap to just below £2,000.

Energy is not the only pressure on firms’ capacity to absorb costs. Separate reporting on hospitality’s tax burden of 82p for every £1 of profit highlights the competing demands on earnings in that sector.

What people are saying

Bailey described businesses as “clearly squeezing margins as well as cost cutting”. His warning was about the duration of the squeeze: the longer elevated energy costs persist, the harder it becomes to shield customers.

The search for savings places operating expenses under scrutiny, a subject covered in Companeo’s guide to cutting business overhead costs. Bailey’s account nevertheless suggests that firms cannot rely indefinitely on finding further efficiencies.

Megan Greene, who voted to raise the Bank rate to 4%, has indicated that stronger economic growth could strengthen the case for tighter monetary policy. Her concern centres on greater pressure on activity and pricing across the economy.

Bailey said higher interest rates had already restrained household income and demand, helping to bring inflation under control. Although GDP had outperformed expectations, including those of the Bank’s economists, he judged growth insufficient for the economy’s needs.

What happens next

November’s decision will test how policymakers balance stronger-than-expected activity against the demand restraint Bailey described. The timing places the rate announcement shortly after the Budget, with the expected January energy increase and the Bank’s early-2027 inflation forecast still ahead.