Bank of England Raises Rates to 4% as Greene Warns of Persistent Wage Pressures
Key Facts
The Bank of England raised its key interest rate to 4% after the Monetary Policy Committee voted 8-1 at a meeting that ended on November 4. The increase was a quarter of a percentage point, while Catherine Mann favored a larger move to 4.25%. In the meeting minutes, Megan Greene said underlying wage growth was "stuck at around 3.5%, above levels consistent with the inflation target." She added that further rate increases "will probably be needed in the future." Greene linked subsequent steps to developments in wages and pricing behavior, and to spare capacity in the economy.
Greene's position indicates that wage pressures remain central to the monetary policy debate, even as the next steps depend on the data. She said underlying wage growth at around 3.5% exceeds the level consistent with the inflation target. In a speech in October, she forecast that wage measures would stabilize near 3.5%, rather than 3%, over the following year, and said the risks to that estimate were tilted to the upside. She also warned that assuming a cooler labor market and weaker demand would contain inflation risks could be unwise. She judged the risk of inflationary pressures feeding through to wages to be greater than previously thought.
Data from the Office for National Statistics showed regular pay growth, excluding bonuses, at 3.7% year over year in June–August 2026. Over the same period, total pay growth, including bonuses, slowed to 3.7% from 3.9% in the previous three-month period. After accounting for inflation measured by the Consumer Prices Index including owner occupiers' housing costs, real regular pay grew 0.6% annually, unchanged from the previous two three-month periods. Average inflation on the same measure was 3.1% in June–August. In the labor market, unemployment fell to 4.7% in the three months through August, while employment growth rose to 0.3% compared with the previous three months.
The bank is balancing the risk of persistent inflation against signs that the pass-through of the energy shock to other prices and wages remains unclear. It said evidence of the second-round effects of higher energy prices "remained limited," but judged that accumulated inflationary pressures were sufficient to justify raising rates. It added that activity data in recent months had generally been stronger than expected. UK consumer price inflation rose to 3.5% in September. The bank expects it to rise to around 5% by the middle of the following year, with the rate path remaining dependent on developments in wages and pricing, and spare capacity.
The bank's forecasts reflect continued concern about the inflation outlook over coming quarters. It projected consumer price inflation of around 4½% in the first quarter of 2027, then around 5% in the second quarter. The short-term estimate was based on average energy prices over 15 UK business days through October 27. In its November report, the bank raised its forecast for private-sector regular pay growth to 3.5% in the fourth quarter of 2027, from 3.1% in its July estimate. It also raised its inflation forecast for the same period to 4.0% from 2.1% in the July report.
The near-term milestones center on activity and price data that could help assess economic pressures. The monthly GDP estimate for September and the first estimate for the third quarter, covering July to September, are due on November 12 at 7:00 a.m. UK time. October consumer price inflation is due on November 18 at 7:00 a.m. The next Monetary Policy Committee decision is scheduled for December 17. Greene said the assessment of subsequent monetary policy steps would depend on wages, pricing and spare capacity.