Bank of England raises rates to 4%, its first hike since 2023, as energy bites

The Bank of England has raised interest rates for the first time in more than three years, and the cost it is fighting is one it has no power to lower. Energy prices driven up by the conflict in the Middle East are pushing British inflation higher, and the Bank’s Monetary Policy Committee decided that waiting any longer risked letting fuel and heating bills seep into wages and shop prices for good.

The move lands first on borrowers. Homeowners on tracker and variable mortgages will see their payments climb as lenders pass it on, and anyone coming off a cheap fixed deal is shopping in a market where loan pricing had already risen before the vote. Savers get a slightly better return, though one still eroded by prices rising almost as fast. The Bank said as much in its own minutes: monetary policy cannot influence global energy prices, only try to stop them from turning into lasting inflation.

The committee voted eight to one to raise Bank Rate by a quarter of a percentage point, to 4%. The lone dissenter, external member Catherine Mann, wanted a half-point increase to 4.25%, arguing that an activist approach was needed before persistent inflation became embedded. At its previous meeting the committee had held at 3.75%, with three of its nine members already voting for a rise.

The forecast explains the shift. UK consumer price inflation reached 3.5% in September, up from 3.1% in August, and Bank staff now expect it to climb to around 4.5% early next year and around 5% by the middle of 2027, well over double the 2% target. Energy alone added about one percentage point to the September figure, mostly through motor fuels. In the weeks before the meeting, Brent crude futures averaged $108 a barrel and UK gas futures 216 pence a therm, up 38% and 81% since the Bank’s July forecast.

For households, the tightening started before the decision. Benchmark two-year fixed mortgage rates have risen by nearly half a percentage point since the start of September, according to the minutes, and new mortgage approvals have been falling. On a £200,000 repayment loan over 25 years, a quarter-point rise adds roughly £30 a month. Companies are faring better: business lending has stayed strong, and activity has outpaced the Bank’s expectations, helped by exports and, the committee noted, some early gains from artificial intelligence.

The case for the increase rests on a risk more than on evidence. The minutes concede there is still limited sign of the second-round effects the Bank fears, in which energy costs spill into pay deals and the prices of other goods, and food inflation has come in lower than expected. Many firms are shielded for now by hedges and fixed-price energy contracts, or are absorbing costs through thinner margins. The Bank’s own weaker-demand scenario imagines households pulling back and price pressure fading without further help from rates. Governor Andrew Bailey tied the central forecast to diplomacy rather than policy. “Put simply, it requires real progress towards settling the conflict in the Middle East,” he wrote, adding that without such news he could “see the argument for a further increase in rates.”

The decision applies only to sterling borrowing. The European Central Bank has already raised its deposit rate twice this year, to 2.5%, while the Federal Reserve kept its range at 3.75% to 4% at its late-October meeting. Investors surveyed by the Bank expected a further rise to 4.25% by February, a path the committee declined to endorse, saying policy is “not on a pre-set path.” Its next decision is due on December 17.

The Bank can make a mortgage dearer in an afternoon. It cannot move the price of a tanker of gas, and its own forecast admits that the answer to British inflation is being settled far from Threadneedle Street.

Tags: inflation, interest rates, energy prices, Andrew Bailey, Bank of England, mortgages