Bank of England raises interest rates to 4% in first hike in over three years as inflation heads towards 5%
The Bank of England has raised Bank Rate from 3.75% to 4% in its first increase since August 2023, warning that further rises are likely if the US-Iran conflict keeps energy prices high and inflation climbing.
The Bank of England has raised interest rates for the first time in more than three years, lifting Bank Rate by a quarter of a percentage point to 4% and warning that inflation could reach around 5% next year if the conflict between the United States and Iran keeps energy prices high.
The nine-member Monetary Policy Committee voted 8-1 in favour of the increase, the Bank announced at noon in London on Thursday. It is the first rise since August 2023, ending a run of six consecutive meetings at which the rate was held at 3.75%. The last change before today was a cut to that level in December 2025, and the move puts the Bank on a tightening path that its main peers have already embarked on.
The single vote against the majority came not from a member who wanted to hold rates steady, as many in the markets had expected, but from Catherine Mann, who argued for a larger half-point rise to 4.25%. Mann had said last month that the Bank had been slow to convince markets it had inflation under control, and in the minutes of the November meeting she pointed to “non-linear inflation risks” after consumer price inflation reached 3.5% in September, which she saw as a possible trigger for a loss of confidence in the central bank.
The latest official figures show consumer price inflation at 3.5% in the year to September, the highest in 11 months and up from 3.1% in August, well above the Bank’s 2% target. The Bank said there was still little evidence of faster price rises outside the sectors directly hit by dearer energy, but the inflationary pressure building up from months of high energy prices made a rise necessary now.
In its central forecast, the Bank now expects inflation to peak at an average of 4.8% in the second quarter of next year, and not to return to 2% until the third quarter of 2028 — six months later than it predicted in July, when forecasts were drawn up during a lull in the US-Iran conflict that had brought energy costs down. In a worse scenario, in which oil prices peak at around $130 a barrel against about $100 now, inflation would reach 6.2% in the third quarter of 2027.
Governor Andrew Bailey was careful to say the move did not commit the Bank to a long run of increases. “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,” he said. In the policy minutes he added: “Without news which softens the risks to inflationary pressures, I can see the argument for a further increase in rates.” Deputy Governor Clare Lombardelli said a further rise was likely to be needed in the near term, while external member Megan Greene and Chief Economist Huw Pill also spoke of further tightening and additional hikes. Two members who had previously been reluctant to raise rates, Swati Dhingra and Alan Taylor, said they would need stronger evidence of second-round effects before backing more tightening.
The Bank also raised its growth forecasts, expecting the economy to expand by 1.6% this year and 1.3% next — notably stronger than the government’s Office for Budget Responsibility predicted last week. It put some of the strength down to spending on artificial intelligence and a small, temporary lift from Chancellor John Healey’s annual budget last week. But it also warned that, after inflation and taxes, households’ income from work was set to fall both this year and next.
The Bank said Mr Healey’s budget would cut inflation by 0.25 percentage points at its peak, but push it up later once temporary cost-of-living help expired. The rise is a blow for the new Prime Minister, Andy Burnham, who has sought to ease pressure on the cost of living.
For households, the rise feeds straight through to the cost of borrowing. UK Finance estimates that a quarter-point rise adds about £31 a month to the bill of a typical tracker mortgage holder, while rates on new fixed deals and personal loans are also likely to edge up. Savers, by contrast, may see slightly better returns, though banks are often slower to pass higher rates on to deposits than to loans.
Financial markets had been almost certain of a rise this month, and are now pricing in three further quarter-point increases during 2027 — more than most economists expect. Market pricing points to another rise as early as February, with a second in the spring and a third before the end of the year, taking Bank Rate to 4.75% by Christmas 2027. Mr Bailey said the gap reflected markets pricing in the tail risk of a sharp further jump in energy prices, while economists’ forecasts rested on the single most likely path of a smaller amount of further tightening.
The Bank’s next decision is due on 17 December. Whether it raises rates again will depend heavily on what happens in the Middle East and on whether energy prices stay high — and on whether signs of second-round inflation, such as faster wage growth and rising prices in services, begin to show up in the data. For now, the Bank has signalled that it is prepared to act again, but only if the evidence points that way.
The figures and statements in this report were checked at 17:21 PKT on 5 November 2026.
This post is market news information only, not financial advice.
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