The Bank of England’s monetary policy committee voted to increase the base interest rate from 3.75% to 4%, marking the first rate rise in more than three years. Eight of the nine committee members supported the decision, while one member advocated for a larger half-point increase instead.
The rate decision was driven by inflationary pressures stemming from the Middle East conflict, which has sustained oil prices above $100 per barrel and disrupted expectations for reopening the Strait of Hormuz. The Bank significantly revised upward its inflation forecast to 4.9% by the middle of next year, compared to its previous estimate of 3.2% issued in July. The consumer prices index showed inflation at 3.5% in September.
Bank Governor Andrew Bailey signaled that additional rate increases could follow, contingent on developments in the Middle East conflict. He cautioned, however, against viewing the current increase as the beginning of an extended series of hikes. The next interest rate decision is scheduled for 17 December, with some analysts suggesting another increase could occur then or in February.
The MPC cited multiple transmission channels for inflation, including pass-through effects from elevated oil and gas costs to household energy bills and food prices. The Ofgem energy price cap is projected to rise to £2,150 annually in January before increasing again in April. The committee also expressed concern that businesses, which have absorbed elevated energy costs through hedging strategies, will eventually pass these expenses to consumers, and that workers may demand higher wages to offset increased living costs.
Recent developments showed oil prices falling below $100 per barrel following Democratic victories in U.S. Congressional elections, which some investors interpreted as potentially limiting escalation of the Iran conflict. Despite this positive movement, Bailey stated that sustained price reductions would be necessary to alter the Bank’s outlook on future rate increases. The government’s recent budget included measures such as extending the fuel duty freeze and maintaining VAT cuts on electricity bills, which the MPC estimated would reduce inflation by a quarter percentage point by mid-2027.
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