Bank of England hikes interest rates to four per cent in unanimous vote

The Bank of England has increased interest rates to four percent, with all policymakers agreeing to tighten monetary policy to stop inflation from spiralling out of control in the coming year. The Monetary Policy Committee, for the first time since mid-2023, raised interest rates for the first time, with one rate-setter, Catherine Mann, voting to raise rates by 50 basis points to maintain credibility.

The Bank's most senior economists warned that inflation could reach 4.9 percent in the middle of next year, with Bank Governor Andrew Bailey stating that the hike may not be the last due to concerns over a potential long war between the US and Iran, which could push prices higher. Bailey emphasized that today's increase should not be seen as the first in a long sequence of hikes, but it is unlikely to be the last if the Middle East conflict is not resolved.

The Bank's main forecast predicts that inflation will only fall back to the two percent target rate in late 2028, with the worst-case scenario of oil prices remaining above $100 per barrel for two years leading to inflation reaching 6.2 percent. While rate-setters were more optimistic about the UK's growth outlook, with a predicted 1.6 percent growth this year and 1.3 percent next year, the policy report cautioned that expected tax hikes starting in 2027 could weaken output.

The Bank believes that energy price-related measures in the Budget will not reduce inflation next year by more than 0.3 percentage points. Bailey alluded to a further interest rate hike, as markets had predicted at least one policymaker would vote against the hike. The MPC concluded that there was pressure in the pipeline, as higher costs would feed into global prices. The forecast did not account for recent market pricing, based on data up until late October.