The Bank of England raised interest rates today for the first time in three years, lifting Bank Rate by a quarter of a percentage point to 4 per cent and warning that at least one more increase may be needed to contain the effect of higher oil prices.
The monetary policy committee voted eight to one for the rise. Catherine Mann, an external rate-setter, voted to go further, to 4.25 per cent.
The Bank now expects consumer price inflation to peak at 4.9 per cent in the second quarter of next year. Should oil reach $130 a barrel, the Bank said inflation would hit 6.2 per cent next year.
Andrew Bailey, the governor, said: “There is now enough inflationary pressure in the pipeline caused by the rise in energy prices, that an increase in Bank rate is warranted.”
He added: “Today’s increase shouldn’t be seen as the first in an inevitable long sequence of hikes. But, unless the conflict in the Middle East is resolved, neither does it seem likely to be the last increase.”
Bailey said it would take “real progress towards settling the conflict in the Middle East” to deter the Bank from another rise. The committee had held rates at 3.75 per cent in September, when three members voted for an increase.
Policymakers said there was “limited” evidence that higher energy prices were pushing up prices or wages across the economy. According to the Bank, companies are not raising the prices they charge consumers and employees are not yet demanding pay deals above inflation, as they did in 2022. Last month Bailey said firms were cutting costs and squeezing margins rather than passing on higher energy bills.
The Bank said, however, that the persistence of high oil prices and the lack of a resolution to the US-Iran war meant price pressures were building through the supply chains used by UK firms.
Consumer prices index inflation was 3.5 per cent in September, up from 3 per cent in January, according to the Office for National Statistics.
The Bank expects the Ofgem price cap to rise from £1,720 this year to £2,150 in January, and to rise again in the spring of 2027. It said tax cuts on energy bills announced in last week’s budget would reduce inflation by around 0.25 percentage points next year, though the effect would fade the following year. The Bank’s Monetary Policy Report projects inflation returning to the 2 per cent target by the middle of 2028.
Analysts had expected the increase but were split on whether it marks the start of another cycle of rises. Traders had bet on a November rise after unemployment fell last month, and now expect the base rate to reach 5 per cent over the next 12 months.
Madison Faller at JPMorgan said: “Today’s move feels like a measured, credibility-preserving one rather than the start of an aggressive cycle. Inflation is elevated, but the evidence that it is broadening beyond energy remains mixed, and further stabilisation in energy prices would reinforce that view. On balance, more hikes may be needed, but the data likely needs to demand it.”
Neil Birrell, at Premier Miton, said: “As expected, the Bank of England raised the base rate and there can be little doubt that there will be more in the first half of next year, its simply about when and how many.”
David Rees, chief economist at Schroders, said: “The Bank of England has been reluctantly dragged into a global hiking cycle driven by imported energy inflation. But this is not the start of an aggressive tightening campaign. Ultimately domestic inflation remains relatively well behaved, and there is still slack in the economy.”
John Healey, the chancellor, said: “The Iran conflict is reaching deep into the pockets of families and businesses here at home.
“In my budget I acted to give some breathing space to families and businesses. Twenty million households will get a £100 energy payment, I extended the tax cut on electricity bills and froze fuel duty.”
