The Bank of England has raised its base rate from 3.75 percent to 4 percent, the first increase in three years, with eight of the nine Monetary Policy Committee members voting for the move. Catherine Mann preferred a half-point increase instead.
Inflation fears cited
The Bank said it now expects UK inflation to peak at 4.9 percent in the middle of next year, well above the 3.2 percent it had forecast back in July. UK CPI inflation stood at 3.5 percent in September. Oil prices persistently above $100 a barrel in recent months, linked to the Middle East conflict involving Iran and fading hopes of reopening the Strait of Hormuz, have FED through to business and consumer costs, the MPC noted.
Governor Andrew Bailey said, “Without news which softens the risks to inflationary pressures, I can see the argument for a further increase in rates and thereafter taking a more conditional approach.” He added that “today’s increase shouldn’t be seen as the first in an inevitable long sequence in hikes,” but that unless the Middle East conflict is resolved, it does not seem likely to be the last.
Budget and energy costs
Oil fell below $100 a barrel after Democrat victories in the US Congress. The government package is expected to trim inflation by 0.25 percentage points in mid-2027.
Ofgem’s energy price cap is expected to rise to 2,150 pounds in January. Food price inflation is forecast to reach 4.75 percent by mid-2027. Businesses have so far absorbed higher energy costs through hedging, but they are expected to begin passing these costs on to consumers.
Within the committee, Alan Taylor, seen as dovish, suggested treating the move as a one-off insurance hike, while Mann argued for a larger half-point rise to restore inflation-fighting credibility. The Bank’s next interest rate decision is set for 17 December.
Related: RBA lifts cash rate to 4.85%, fifth hike of 2026 · ECB keeps all three key rates unchanged at 2.50% deposit rate
Source: Bank of England
