Bank of England raises rate to 4%, first increase in over three years

The Bank of England has raised its main interest rate by a quarter point to 4%. It is the Bank's first increase in more than three years. The move aims to tackle inflation stoked by the Iran war, which has lifted energy prices.

Energy prices have fallen since the US midterm elections, the Wall Street Journal reported, while the Guardian said oil had dropped below $100 a barrel. The newspaper said oil had stayed above $100 in recent months as hopes faded for a deal to reopen the Strait of Hormuz. The Wall Street Journal said the midterms raised hopes for an end to the war, while the Guardian said some investors interpreted the Democrats' victories as potentially constraining Donald Trump's capacity to prolong the conflict.

The vote and the forecasts

According to the Guardian, eight of the nine Monetary Policy Committee members voted for the rise from 3.75% to 4%. The ninth, Catherine Mann, preferred a half-point increase.

The Guardian reported that the Bank expects UK inflation to reach 4.9% in the middle of next year, up from 3.2% in its July forecast. Consumer price inflation was 3.5% in September.

The committee also expects real post-tax income to fall this year and next, the Guardian reported. It expects the Ofgem energy cap for an average household in Great Britain to rise from the equivalent of £1,723 a year to £2,150 in January, and to increase again in April. It warned that food price inflation could reach 4.75% by mid-2027.

The committee said John Healey's budget, delivered a week before the decision, would reduce inflation by a quarter percentage point in mid-2027, according to the Guardian.

The next rate decision will be announced on 17 December, the Guardian reported.

What each side says

• Andrew Bailey, Bank of England governor: The Guardian quoted him as saying: "Today’s increase shouldn’t be seen as the first in an inevitable long sequence in hikes. But, unless the conflict in the Middle East is resolved, neither does it seem likely to be the last increase."
• Monetary Policy Committee: It believes businesses will soon have to start passing higher energy costs on to consumers. Members are also concerned about workers seeking larger pay rises, according to the Guardian.
• Catherine Mann: She argued that an immediate half-point rise was necessary to restore the Bank's inflation-fighting credibility, the Guardian reported.
• Alan Taylor, committee member: The Guardian quoted him as describing a "risk-management ‘one-for-now’ insurance hike".
• John Healey: The Guardian quoted him as saying: "The Iran conflict is reaching deep into the pockets of families and businesses here at home."

The reports do not quantify the effect on mortgage borrowers or other households. Most details come from the Guardian. The Wall Street Journal and Associated Press items reviewed are brief summaries.

Analysis

The decision places the Bank between two risks: energy costs feeding into prices and wages, and further pressure on household incomes. If energy prices keep falling, the case for more increases could weaken. If the conflict continues and businesses pass on costs, it could strengthen. Committee views range from a one-off increase to a larger immediate move. The budget measures may ease some pressure, according to the committee's estimate, but do not remove the risks it describes. The 17 December decision may show which view carries more weight, although the outcome remains uncertain.

Produced by the Vocemundi newsroom with AI assistance.