Bank of England Raises Rates to 4% on an 8-1 Vote, Its First Hike Since 2023, and Warns Inflation Will Near 5%

The Bank of England raised Bank Rate to 4 percent at noon on Thursday, a quarter-point increase and the first since August 2023. The Monetary Policy Committee voted 8-1: Andrew Bailey, Sarah Breeden, Swati Dhingra, Megan Greene, Clare Lombardelli, Huw Pill, Dave Ramsden and Alan Taylor for the quarter point, and Catherine Mann for a half-point rise to 4.25 percent, the Bank's policy summary shows. It makes the Bank the last of the big central banks to start tightening since the United States and Israel went to war with Iran, and it came with a forecast that UK inflation will reach about 5 percent by the middle of 2027.

Governor Andrew Bailey said the increase should not be read as the start of an inevitable long sequence, but added: "unless the conflict in the Middle East is resolved, neither does it seem likely to be the last increase," the Bank's decision page records.

Why did the Bank of England raise rates?

Energy. The conflict is in its ninth month and global oil and gas prices keep rising, pushing up fuel and utility bills. UK inflation rose to 3.5 percent in September, from 3.1 percent in August and against the 2 percent target, with motor fuel the main driver. The Bank's own July forecast had pencilled in 3.0 percent for September. The committee's judgement is that the economy has been more resilient than expected and that it must act now to stop energy costs spreading into other prices and into wages.

The vote was more hawkish than the City expected. A Reuters poll of economists had looked for 7-2 with two members voting to hold; instead the only dissent was in favour of a bigger move. The decision also marks a sharp turn from January, when most forecasters expected rate cuts this year. Scott Gardner of JPMorgan Personal Investing called the hike hugely symbolic and pointed to early signs of second-round inflation effects.

What did Bailey say about further rate rises?

Bailey said he could see the argument for a further increase, with the path after that conditional on energy prices and the inflation data, CNBC reported. The committee's own wording is that policy is not on a pre-set path, and Taylor, one of the two members economists had expected to vote for a hold, described the move as insurance and not the start of a hiking cycle. Markets priced about a one-in-four chance of another rise at the next meeting on 17 December. Before the decision, money markets had been pricing three to four more quarter-point rises in 2027, which would take Bank Rate to between 4.75 and 5 percent, a path many economists consider too aggressive.