Bank of England raises interest rate to 4% amid energy-driven inflation

The Bank of England raised its key interest rate to 4% from 3.75% on Thursday, the first increase in over three years, as inflation accelerated to an 11-month high of 3.5% in September. The move was widely expected after the September inflation data cemented market expectations of a rate rise this month. Eight policymakers voted for the quarter-point increase, while one preferred a half-point rise.

The central bank cited rising energy costs due to the Iran war as the main cause of the inflation pickup. Bottlenecks in the Strait of Hormuz squeezed global oil and gas supplies, pushing up fuel costs. The Bank said there was limited evidence that higher energy costs were feeding through to other prices and wages, but warned that inflation could reach around 5% by mid-2027.

More rate rises possible

The Bank said the economy was more resilient than expected, but growth was likely to slow in coming quarters. It raised its growth forecasts to 1.6% for this year and 1.3% for 2027, up from 1.1% for both in July. The Bank also expects the Budget to reduce inflation by a quarter of a percentage point by the second quarter of 2027.

Governor Andrew Bailey signalled that further rate rises were possible but not inevitable. “Today’s increase shouldn’t be seen as the first in an inevitable long sequence of hikes,” he said. “But, unless the conflict in the Middle East is resolved, neither does it seem likely to be the last increase.” The Bank will judge the outlook at each meeting.

Market interest rates remained above pre-conflict levels, with benchmark two-year mortgage rates up nearly half a percentage point since early September. The Bank’s latest survey showed a median expectation for Bank Rate of 4% in November and 4.25% in February. The decision followed recent rate rises by the US Federal Reserve and European Central Bank in response to inflation fuelled by the Iran war.