The Bank of England looks set to leave interest rates on hold today despite inflation hitting a five-month high. 

UK borrowing costs eased back from recent highs yesterday with the yield on ten-year UK bonds falling close to 5.28 per cent having spiked to a 19-year high of nearly 5.44 per cent earlier in the week.

Markets now see just a one in five chance that the Bank of England’s monetary policy committee will hike rates when it announces its latest decision at noon on Thursday.

And while investors are still betting there will be four rate increases by the end of next year, that is down from as many as five that were expected earlier in the week.

Today's decision by the Bank of England comes after the Federal Reserve raised interest rates in the US last night.

The Bank is grappling with rising inflation, with figures from the Office for National Statistics (ONS) yesterday showing the consumer prices index edged up to 3.1 per cent in August as the Iran war caused fuel prices to soar.

Yet core inflation – which strips out volatile food and energy prices – held steady for the fourth month in a row at 2.6 per cent.

That will raise hopes that the price rises caused by the war are not spreading to the wider economy at least for now.

However, with gas and oil prices remaining elevated as the Middle East war shows little sign of resolution, inflation pressures could intensify. Recent forecasts suggest energy bills, already at a three-year high, could surge by as much as 25 per cent in January.

Economists at Nomura said the latest data ‘cements an unchanged Bank rate decision’ today but that inflation looks set to move higher in coming months ‘increasing the pressure on the MPC to raise rates’.

James Sproule, chief economist at Handelsbanken, said he expected the Bank to ‘set out a clear path that it intends to tighten at the next meeting on November 5'.

Sanjay Raja, chief UK economist at Deutsche Bank, said: ‘Inflation is on the ascent with an unknown destination.’

Raja pointed to the likely Ofgem price cap rise of more than 20 per cent in January and an expected upturn in food price inflation caused by recent heatwaves, drought and the El Nino weather event.

‘For the Bank of England, its job to keep inflation at 2 per cent has become harder,’ Raja said.

‘Our own projections point to CPI on course to get close to 4 per cent around the turn of the year. Rates may be restrictive, but the key policy question for the MPC will remain: are they restrictive enough?

‘Risk management considerations have become stronger, and the likelihood of rate hikes have strengthened of late.’