Bank of England raises interest rates to 4%, the first increase for more than three years

Decision by MPC a week after the budget comes as Iran war continues to drive up energy costs

The Bank of England has raised interest rates for the first time in three years and warned of another increase to come, to combat soaring inflation unleashed by the Iran war.

Eight members of the Bank’s monetary policy committee (MPC) voted for the move, which takes the base rate from 3.75% to 4%. The ninth member, Catherine Mann, preferred a more dramatic half-point increase.

The Middle East conflict has pushed oil prices persistently above $100 in recent months, as hopes evaporated of a deal that could reopen the key strait of Hormuz.

As a result, the Bank now expects UK inflation to spike to 4.9% in the middle of next year – up from 3.2% in its last economic forecast, in July. Inflation hit 3.5% in September, as measured on the consumer prices index.

The decision, which will hit mortgage borrowers, comes a week after John Healey used his first budget to promise “breathing space” for hard-pressed consumers. Echoing the Office of Budget Responsibility’s gloomy forecasts for living standards, the MPC expects real post-tax income to fall, this year and next.

The Bank’s governor, Andrew Bailey, raised the prospect of another rate rise in the near future – with a resolution to the Iran conflict the key factor that will influence the decision.

“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, in the MPC minutes.

However, he played down the likelihood of a prolonged series of increases, as markets have been predicting. “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,” he said. The Bank’s next interest rate decision will be announced on 17 December.

Oil prices have fallen sharply, to below $100 a barrel, in the wake of Democrat victories in the US Congress, which some investors interpreted as potentially constraining Donald Trump’s capacity to prolong the conflict in Iran. Trump’s vice-president, JD Vance, blamed the war, and its impact on inflation, for the rout.

Explaining their decision to raise borrowing costs, the MPC highlighted the pass-through from elevated oil prices to business and consumer costs across the economy. It expects the Ofgem energy cap, which determines household bills, to rise to £2,150 in January; and to increase again in April. Food price inflation could hit 4.75% by mid-2027, it warns.

Businesses have so far reported in the Bank’s surveys that they have been able to absorb soaring oil and gas prices – by hedging their energy costs, for example – but the MPC believes they will soon have to start passing them on to consumers, in higher prices.

They are also concerned about workers seeking to offset the impact of the higher cost of living, by bidding for bumper pay rises.

While the decision to hike rates was supported by all MPC members, the minutes of the meeting reveal stark divisions over how much further they may need to go, to bring inflation under control. The dovish Alan Taylor suggested this should be a “risk-management “one-for-now” insurance hike”, while Mann argued that an immediate half-point rise was necessary, to restore the Bank’s inflation-fighting credibility.

Healey’s budget included measures aimed at cushioning the impact of higher energy prices – including extending the fuel duty freeze, and the VAT cut on electricity bills. The MPC said the package would shave a quarter percentage point off inflation in mid-2027.