The Bank of England’s Monetary Policy Committee voted 8-1 to raise the policy rate by 25 basis points to 4%. External member Catherine Mann voted for a larger 50 basis point hike, to 4.25%.
Andrew Bailey, the BoE Governor, said today’s increase should not be seen as the first of an inevitable and long series of rate increases. He also said it does not look like the last while the conflict in the Middle East remains unresolved. Bailey said he could see the argument for further rate increases, followed by a more conditional approach.
Inflation outlook worsens
The BoE now projects peak CPI inflation of 4.9% in the second quarter of next year. That compares with a peak of 3.2% in the previous July forecast round. Inflation would reach 6.2% in Q3 2027 under an adverse scenario of repeated escalation in the Iran conflict.
Energy bills are expected to rise 25% in January. The energy price cap will be reset then, with a further increase expected in April.
Growth forecasts revised up
The BoE revised its GDP growth forecast for this year to 1.6%, from 1.1%. For 2027 it raised the figure to 1.3%, while for 2028 it cut it to 1.2%, from 1.7%. The UK economy has performed more resiliently than expected.
Alan Taylor, an external MPC member, described the step as a temporary insurance increase for risk management purposes. Dave Ramsden, Deputy Governor for Markets, wrote that less favourable starting conditions raise the risk of second-round effects.
Policy stays data-dependent
The MPC has changed its forward guidance. It will assess at each meeting whether high energy prices pass through to other prices and the wider economy. Policy is not on a pre-set path.
The committee will watch second-round effects on core wages, pricing behaviour and spare capacity. Policy remains restrictive, the decision said.
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Source: Bank of England
