Bank Rate rises to 4 per cent in the first increase since 2023, with inflation set to near 5 per cent
The Monetary Policy Committee voted 8-1 to lift Bank Rate by a quarter point to 4 per cent, as one member pressed for a half point rise and the Bank warned that higher energy prices could yet feed through into pay and prices.
The Bank of England has raised interest rates for the first time in more than three years. At its meeting ending on 4 November, the Monetary Policy Committee voted by eight votes to one to increase Bank Rate by 0.25 percentage points, to 4 per cent, with the decision published on 5 November. The single dissent came from Catherine L Mann, who wanted a larger rise of 0.5 percentage points, to 4.25 per cent. The eight members backing the quarter point move were Andrew Bailey, Sarah Breeden, Swati Dhingra, Megan Greene, Clare Lombardelli, Huw Pill, Dave Ramsden and Alan Taylor.
The rise is a response to an energy shock that is still building. The conflict in the Middle East is in its ninth month, Averaged across the 15 UK working days ending on 27 October, Brent crude futures stood at $108 a barrel and UK natural gas futures at 216 pence a therm. Those levels sit 38 per cent and 81 per cent above where they stood when the July Monetary Policy Report appeared. UK CPI inflation reached 3.5 per cent in September, up from 2.6 per cent in June, with direct energy effects contributing around one percentage point of the September figure, most of it from fuels.
On the Bank's latest projections, that is only the start of the climb. Staff expect headline inflation to reach around 4.5 per cent in the first quarter of 2027 and around 5 per cent in the second quarter, roughly the middle of next year. In the central projection published with the November Monetary Policy Report, inflation stays well above the 2 per cent target throughout 2027 and the first half of 2028, returning to target only in the third quarter of 2028, as the effect of dearer energy drops out of the annual comparison and tight policy bears down on prices.
The dissent came from the hawkish side: the argument inside the room was about how hard to lean against the energy shock, not whether to move.British Journal analysis
The Committee's stated worry is not the energy bills themselves, which monetary policy cannot change, but what follows them. So far there is limited sign of knock-on effects in other prices and wages: food inflation has run lower than expected earlier in the year, and many firms have absorbed higher costs in their profit margins rather than passing them on. But members judged that firms' buffers would mostly prove temporary, that underlying measures of inflation have stopped falling and sit somewhat above target-consistent rates at around 4 per cent for services, and that stronger than expected activity data added to the case for modestly tighter policy.
Mann's case for going further was set out in the minutes in risk management terms: an activist approach, she argued, was needed to stop persistent inflationary dynamics becoming embedded as the economy reached thresholds that could trigger non-linear responses in price and wage setting. The majority agreed the chance of material second round effects emerging had grown since the September meeting and might stay elevated for a while yet, while noting that households and firms appear unusually attentive to headline inflation after five years of high prices.
Households are already feeling the tightening through markets, ahead of this decision. Benchmark two year mortgage rates had climbed by nearly 50 basis points since the start of September, new mortgage approvals were falling, and the Bank's Market Participants Survey put the median expected path at 4 per cent in November and 4.25 per cent in February. The projections were conditioned on the Budget of 28 October, whose measures the Bank expects to trim around a quarter of a percentage point from CPI inflation by the second quarter of 2027, with only a small effect on activity.
What happens next is deliberately left open. The Bank says monetary policy is not on a pre-set path, and that it will judge each meeting on the evidence, watching underlying pay, pricing behaviour and slack for signs of how far high energy prices are feeding through. Its central projection has growth slowing in the final quarter of 2026 and in 2027, output running about 1 per cent below potential, and unemployment rising slightly to 5.1 per cent. The Report also sets out two alternative paths: an adverse scenario in which energy prices stay high and second round effects are much stronger, and a weaker demand scenario in which inflation falls below target during 2028 and reaches 1.2 per cent in 2029. The next rate decision is due on 17 December.
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