Bank of England lifts rate for first time since 2023 to fight inflation

The Bank of England (BoE) lifted its benchmark interest rate to four percent on Thursday, marking the first increase in over three years due to surging energy costs driving up global inflation. The central bank raised borrowing costs by a quarter point, aligning with the US Federal Reserve and the European Central Bank since the beginning of the Middle East conflict.

The ongoing strikes on Russian refineries by Ukraine and disruptions to Gulf energy supplies resulting from the US-Iran war have resulted in record-high diesel prices worldwide.

BoE Governor Andrew Bailey stated that there is now sufficient inflationary pressure in the pipeline caused by the rise in energy prices, justifying the interest rate hike. He clarified that today's increase should not be seen as the start of an inevitable long sequence of hikes nor the last one, unless the Middle East conflict is resolved.

Despite the surging inflation, the bank upgraded its forecasts for UK economic growth in 2026 and 2027, now estimating GDP growth to hit 1.6 percent this year and 1.3 percent next year, up from July's forecast of 1.1 percent for both years.

The BoE last raised its key interest rate in August 2023 and has maintained the cost of borrowing at 3.75 percent since December. Britain's annual inflation rate surged beyond expectations in September, reaching 3.5 percent, significantly above the bank's target of two percent. The BoE projected that UK inflation could peak at 4.9 percent in the second quarter of next year.

The expected increase in energy bills from the start of 2027 affects millions of Britons, even after the government provided some assistance in its annual budget announcement last week.