The Bank of England raised interest rates on Thursday for the first time since August 2023. The base rate rose by a quarter point, from 3.75% to 4%. The Bank said the move aims to curb inflation driven mainly by the Iran war's impact on oil prices, the BBC reported.
According to the Guardian, the conflict has kept oil prices above $100 a barrel for months. Hopes of a deal to reopen the Strait of Hormuz have faded. The Bank now expects UK inflation to peak at 4.9% in mid-2027, up from 3.2% in its July forecast. Inflation reached 3.5% in September. The BBC reported that inflation could hit 6.2% in 2027 in an "adverse scenario" in which the war escalates. The Bank does not expect inflation to return to its 2% target until 2028.
Eight of the nine members of the monetary policy committee voted for the quarter-point rise. The ninth, Catherine Mann, wanted a half-point increase to 4.25%. The minutes reveal splits over what comes next. Alan Taylor called the move a "one-for-now" insurance hike. Megan Greene said more hikes might follow, depending on wages, prices and jobs.
Bailey said the rise should not be seen as the first in a long run of hikes. But he warned that it is unlikely to be the last unless the Middle East conflict is resolved. He welcomed the sharp fall in oil prices over the past 48 hours, which the Guardian linked to Democratic gains in the US Congress. However, he said the drop would have to last before he changed his view.
For households, the hike makes mortgages, loans and credit cards more expensive, though savers will earn more. Banking trade body UK Finance said 510,000 tracker mortgage holders will pay £31 more a month, the BBC reported. The Bank expects the Ofgem energy cap for an average household to rise from £1,723 to £2,150 a year in January.
John Healey, who presented his first budget a week ago, said the Iran conflict "is reaching deep into the pockets of families and businesses". He pointed to a £100 energy payment for 20 million households, a fuel duty freeze and a tax cut on electricity bills. The Bank's next rate decision is due on December 17.