The Bank of England has raised its base rate by 0.25 percentage points from 3.75% to 4%, after its monetary policy committee (MPC) judged that rising energy prices had built up enough inflationary pressure in the pipeline to warrant an increase.
Eight of the nine members of the rate-setting committee – governor Andrew Bailey, Sarah Breeden, Swati Dhingra, Megan Greene, Clare Lombardelli, Huw Pill, Dave Ramsden and Alan Taylor – voted for the rise. Catherine Mann voted against, preferring a larger increase of 0.5 percentage points to 4.25%.
The MPC said conflict in the Middle East had kept energy prices high and volatile, pushing up households’ motor fuel and utility costs. It said the increase was intended to limit how far those costs feed through into other prices across the economy.
In September, the committee had expected inflation to rise to slightly above 4% in the first quarter of 2027. Its new forecasts, published alongside today’s decision, show inflation reaching about 4.5% in the first quarter of 2027 and around 5% in the second quarter.
The Bank said new policy measures announced at the Budget were expected to reduce CPI inflation by 0.25 percentage points by the second quarter of 2027, with a small impact on economic activity. The latest Office for National Statistics print shows CPI inflation was 3.5% in the 12 months to September 2026, up from 3.1% the previous month.
Bailey said: “There is now enough inflationary pressure in the pipeline caused by the rise in energy prices that an increase in bank rate is warranted.
“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 MPC will judge the outlook at each meeting, responding as necessary to bring inflation sustainably back to our 2% target.”
Mann, who voted for the larger increase, said her preferred move reflected a “risk management and credibility perspective.” She argued that the economy had moved into a state in which price and wage pressures were more likely to reinforce each other.
David Rees, chief economist at Schroders, said: “The Bank of England has been reluctantly dragged into a global hiking cycle driven by imported energy inflation. But this is not the start of an aggressive tightening campaign. Ultimately domestic inflation remains relatively well behaved and there is still slack in the economy.”
Rees said he expected UK interest rates to peak at 4.25%, below the path currently priced by financial markets, though he added the risks “are mounting”. He said continued rises in energy prices meant inflation was likely to peak later and higher than previously expected, at around 4.5% next summer, and that the key question was whether the shock stayed contained to energy or began feeding into domestic wages and services prices.
Commenting ahead of the decision, Andrew Wishart, senior UK economist at Berenberg, said: “Although several rate setters will vote for the hike reluctantly, developments in the real economy justify it. Strong economic growth and a tentative stabilisation of the labour market suggest that an interest rate hike will restrain economic activity only modestly.”
Wishart expects no more hikes in 2026, assuming energy prices fall and consumer spending slows, but said a second rise in February would become more likely if economic activity continued to beat expectations or if oil prices stayed high.
Jeremy Batstone-Carr, European strategist at Raymond James, said before the decision: “Very clearly, any adjustment in monetary policy can do little to prevent an energy price shock, but higher rates can serve to limit the extent to which price pressures pass through into a wider range of costs.”
Batstone-Carr said financial markets expected the base rate to reach 5% and remain there through 2027 and 2028, noting that the Office for Budget Responsibility had confirmed weaker economic activity at last week’s Budget.