Bank of England Raises Key Rate to 4%, First Hike in More Than Three Years

The Bank of England raised its key interest rate to 4% on Thursday, the first hike in more than three years, as Middle East energy costs push British inflation higher.

At its meeting ending Nov. 4, the Monetary Policy Committee voted 8-1 to lift Bank Rate by 0.25 percentage points from 3.75%, the Bank of England said.

Catherine L Mann preferred a 0.50-point increase to 4.25%.

It was the first rise since August 2023 and made the BoE the last major central bank to tighten since the U.S.-Iran war began, CNBC reported.

UK CPI inflation was 3.5% in September and is expected to rise to around 5% by mid-2027 before falling back toward the 2% target as energy base effects fade, the Bank said.

The BBC said the Bank now expects inflation to peak at 4.9% in the middle of next year and not return to 2% until 2028, the BBC reported.

“The conflict in the Middle East is now in its ninth month. Global energy prices have continued to rise from an already elevated level,” the MPC said in its summary.

Bailey’s Message and Mortgage Hit

Governor Andrew Bailey said the decision “shouldn’t be seen as the first in an inevitable long sequence of hikes,” he told the BBC.

But he warned that “unless the conflict in the Middle East is resolved, neither does it seem likely to be the last increase,” the BBC reported.

“Put simply, it requires real progress towards settling the conflict in the Middle East,” Bailey said.

Bailey also pointed to encouraging news from the sharp oil-price drop after the U.S. midterms, which could limit further hikes if the decline is sustained, the Associated Press reported.

UK Finance said about 510,000 tracker mortgage holders face roughly a £31 monthly jump in repayments after the quarter-point move, the BBC reported.

Homeowners on fixed deals see no immediate change, though future products may be affected.

The Bank said there remains limited evidence so far of knock-on effects into other prices and wages, with many firms absorbing higher energy costs through lower margins, the MPC summary said.

Activity data in recent months have generally been stronger than expected, adding to the case for modestly tighter policy, policymakers said.

Monetary policy is “not on a pre-set path,” and the Committee will keep judging how likely high energy prices are to feed through to other prices by monitoring pay, pricing behavior and slack.

Markets had heavily priced a November hike; traders will now watch December and energy headlines for whether Bailey’s conditional stance means another move or a pause if oil stays softer.

Mann, the lone dissenter, argued a larger move was needed on risk-management grounds as projected CPI nears thresholds where wage and price responses can intensify.

For households, the immediate cash impact falls mainly on tracker and standard-variable borrowers, while savers may see higher deposit rates if lenders pass through the quarter-point rise.

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