The Bank of England has raised interest rates for the first time in more than three years in a bid to tackle an inflation shock stoked by the US-Iran war.
The decision to lift the bank’s main interest rate to 4.0 per cent from 3.75 per cent was widely expected given a recent surge in prices.
All nine members of the Monetary Policy Committee voted for a hike although one backed an even bigger increase to 4.25 per cent.
“There is now enough inflationary pressure in the pipeline caused by the rise in energy prices, that an increase in bank rate is warranted,” BoE governor Andrew Bailey said.
“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.”
The pressure on the bank to act has grown steadily in recent months.
When inflation hit an 11-month high of 3.5 per cent in September – well above the bank’s 2.0 per cent target – it cemented market expectations of a rate hike this month, with potentially more to come in 2027.
The main cause behind the spike in inflation this year has been the sharp rise in fuel costs as a result of the Iran war and the ensuing bottlenecks in the Strait of Hormuz.
It is the first time that borrowing costs have gone up in the United Kingdom since August 2023.
The Bank of England said on Thursday that it currently expects inflation will continue to accelerate in the coming months before peaking at “around 5.0 per cent” in the second quarter of 2027.
It is then likely to steadily fall until it reaches the central bank’s 2.0 per cent target in the third quarter of 2028.
with PA
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