Bank of England Raises Rate to 4% in 8-1 Vote Amid Energy Shock
Key Facts
The Bank of England raised its interest rate by a quarter of a percentage point to 4%, in a decision taken by the Monetary Policy Committee by 8 votes to 1 at a meeting that ended on 4 November. Catherine Mann voted for a larger, half-point increase that would have lifted the rate to 4.25%. The decision came as global energy costs rose amid the conflict in the Middle East, prompting the bank to act against mounting inflationary pressures. The bank said the duration and scale of higher energy prices had generated sufficient inflationary pressure in the price outlook to warrant a rate increase. The decision places energy developments and their pass-through to domestic prices at the center of the bank’s assessment of the monetary policy outlook.
UK consumer price inflation was 3.5% in the 12 months to September, up from 3.1% in August, according to the Office for National Statistics. The Bank of England said direct energy effects contributed about one percentage point to the September reading, with most of that impact driven by fuel. Much of the inflation recorded that month therefore came from energy, while the bank was monitoring the possibility that its effects would spread to other items. The bank said evidence of higher energy costs passing through to wages and other prices remained limited so far. But it said the risks of second-round inflation effects had increased since September, strengthening the case for tighter policy.
The bank’s staff projections show consumer price inflation reaching about 4.5% in the first quarter of 2027, then about 5% in the second quarter. The projected first-quarter reading is about 1.25 percentage points above the estimate in the July report. In the report’s central projection, inflation reaches 4.0% in the final quarter of 2027, compared with July’s forecast of 2.1% for that quarter. The central projection then falls to 2.0% in the final quarter of 2028. Measures announced in the 2026 budget are expected to reduce inflation by a quarter of a percentage point in the second quarter of 2027, with that effect unwinding in the following year, and to have a limited impact on demand over the Committee’s forecast horizon.
Oil and gas futures prices were well above the levels recorded when the July report was prepared. The average front-month Brent contract was $108 a barrel, while the average front-month UK gas contract was 216 pence per therm over the 15 working days to 27 October. Those levels represented increases of 38% for Brent and 81% for gas compared with the time of the July report. The jump helps explain the bank’s revision to its near-term inflation forecasts, given the direct contribution of energy to the September reading. It also relates to the bank’s assessment that the persistence and scale of the energy shock had generated enough pressure in the price outlook to raise rates.
The median survey of market participants cited by the Bank of England in its report showed expectations for the interest rate to rise to 4% in November and then to 4.25% in February. Participants expected the rate to be 3.5% in two and three years. On household financing, the bank said average two-year standard mortgage rates had risen by about 50 basis points since the start of September, while approvals for new household mortgages had declined. These moves add another channel through which tighter monetary policy passes through to borrowing costs and demand. At the same time, the bank cut its central forecast for gross domestic product growth to 1.0% in 2027, from 1.4% in the July report, and to 1.4% in 2028, from 1.7%.
Bank of England Governor Andrew Bailey said the increase “should not be seen as the first in a long, inevitable series of increases,” linking the policy outlook to developments in the war with Iran. He added that the continuation of the conflict in the Middle East meant the increase might not be the last. His position indicates that the November decision alone does not determine the path of interest rates ahead, as the conflict’s evolution remains a factor in assessing energy and inflationary pressures. The next Monetary Policy Committee meeting is scheduled for 17 December 2026. That will be the next scheduled date for a decision on the interest rate.