The Bank of England raised its base rate from 3.75% to 4% on Thursday, its first increase in more than three years, as it warned that the Iran war is pushing inflation higher and that a further rise is likely unless the conflict is resolved, The Guardian reported. Eight members of the Monetary Policy Committee backed the quarter-point move, with Catherine Mann the sole dissenter, preferring a half-point increase to 4.25%, according to The Independent.
The decision reverses a three-year easing cycle and lands squarely on UK borrowers and businesses. The Bank now expects inflation to rise to 4.9% in the middle of next year, up from 3.2% in its previous forecast in July, The Guardian reported. Consumer prices inflation stood at 3.5% in September. The Independent described the Bank's own projection of 4.9% as above most economists' predictions.
What drove the decision
The proximate cause is energy. The Middle East conflict has kept oil prices persistently above $100 a barrel in recent months, as hopes faded of a deal to reopen the Strait of Hormuz, The Guardian reported. The committee highlighted the pass-through from elevated oil prices into business and consumer costs, and expects the Ofgem energy cap to rise from the equivalent of £1,723 a year for an average household in Great Britain to £2,150 in January, with a further increase in April. Food price inflation could reach 4.75% by mid-2027, it warned. Businesses have so far told the Bank's surveys that they have absorbed higher oil and gas prices, partly by hedging energy costs, but the committee believes they will soon begin passing them on to consumers, The Guardian reported. It is also concerned that workers will seek larger pay rises to offset the higher cost of living, a second-round effect that would make inflation stickier.Bailey leaves the door open
Governor Andrew Bailey raised the prospect of another increase in the near future, with a resolution to the Iran conflict the key variable. "Without news which softens the risks to inflationary pressures, I can see the argument for a further increase in rates and thereafter taking a more conditional approach," he said, according to the MPC minutes cited by The Guardian. He played down the likelihood of a long series of increases, saying: "Today's increase shouldn't be seen as the first in an inevitable long sequence in hikes. But unless the conflict in the Middle East is resolved, neither does it seem likely to be the last increase." The Bank's next decision is due on 17 December, and some analysts expect a pre-Christmas move. Andrew Goodwin, chief economist at Oxford Economics, said the degree of inflationary pressure already in the system makes another hike in December or February likely, The Guardian reported. James Smith, developed markets economist at ING, said every part of the decision was more hawkish than expected and validated a call for another hike in February, with December clearly in play, according to The Independent. Deutsche Bank's Sanjay Raja took a different view, retaining a forecast of one more hike to a peak of 4.25%.Markets and the political backdrop
The hawkish tone hit equities. The FTSE 100 gave back strong early gains to close lower, having earlier traded at a record high, The Independent reported. The FTSE 250 also ended lower, and the AIM all-share shed 0.5%. In the US, the Dow Jones Industrial Average was down 2.2%, the S&P 500 2.9% lower and the Nasdaq Composite down 3.7% around the London close, amid worries that the Democrats will rein in data-centre spending after their election win. The politics cuts both ways. The decision came a week after John Healey used his first budget to promise "breathing space" for hard-pressed consumers, The Guardian reported, including a £100 energy payment for 20 million households, an extension of the VAT cut on electricity bills and a fuel duty freeze. The Bank said the package would shave a quarter of a percentage point off inflation in mid-2027. The shadow chancellor, Andrew Griffith, called the rate rise "another headwind for hardworking families to deal with". Oil prices have since fallen below $100 a barrel after the Democrats' midterm victories, which some investors read as constraining Donald Trump's capacity to prolong the conflict. Brent was trading at $97.34 a barrel on Thursday, down from $99.00 late on Wednesday, The Independent reported. Bailey welcomed the fall but said it would need to be sustained to change his view, noting there is already significant inflationary pressure in the pipeline.Why it matters
For UK borrowers, the immediate effect is higher mortgage and debt-servicing costs. For companies, the signal matters more than the quarter-point move: the Bank is telling businesses to plan for a base rate that stays higher for longer, with the path dependent on a war it cannot control. The pound firmed to 1.3473 dollars from 1.3464, The Independent reported, a modest reaction that suggests markets had largely priced the move. The decision also exposes the limits of domestic policy. A budget designed to cushion households and businesses is being offset by a rate rise driven by an energy shock rooted abroad, and the Bank's own forecast of falling real post-tax income this year and next underlines how little the Chancellor can do about the underlying cause.Risks and unknowns
The central uncertainty is the Iran conflict. If a resolution holds and energy prices stay lower, the case for further hikes weakens; if the conflict drags on, the Bank has signalled it will act again. The committee itself is divided, with Alan Taylor describing the move as a "risk-management 'one-for-now' insurance hike" and Mann arguing for a half-point rise to restore credibility, The Guardian reported. Analysts are split on whether the peak is 4.25% or higher, and markets were pricing a 51% chance of a December hike, according to Peel Hunt's Kallum Pickering, as cited by The Independent.Sources and References
- The Guardian (theguardian.com)
- The Independent (independent.co.uk)
