Bank of England raises interest rate to 4%, first hike since 2023

Rate decision

The Bank of England raised its key interest rate by 25 basis points to 4% on Thursday, the first increase since August 2023. The Monetary Policy Committee voted 8-1 for the quarter-point hike, with one member voting for a 50-basis-point increase to 4.25%.

Inflation outlook

Policymakers said they expected U.K. inflation to rise to "about 5%" by the middle of 2027, more than double the bank's 2% target. The MPC said the conflict in the Middle East was in its ninth month and that global energy prices had continued to rise from an already elevated level. Data released earlier this month showed the U.K.'s annual inflation rate jumped to 3.5% in September, driven by the surging cost of motor fuels.

Officials' comments

Governor Andrew Bailey said: "Today's increase should not be seen as the first in an inevitable long sequence of hikes. That is not inevitable. But unless the conflict in the Middle East is resolved, neither does it seem likely to be the last increase."

Catherine L Mann, the MPC's most hawkish member, said she voted for greater tightening because research pointed to "non-linear inflation risks." She added that her recent votes to increase Bank Rate by 25 basis points represented a "down payment" to lean against second-round effects.

Markets

Yields on U.K. government bonds, known as gilts, continued to edge higher after the announcement. The yield on the benchmark 10-year gilt was last seen 2 basis points higher at 5.1546%, while the 2-year gilt yield rose by 4 basis points to trade at 4.782%. The British pound was flat against both the U.S. dollar and the euro on Thursday afternoon.

Why it matters

The rate rise increases borrowing costs for businesses and home owners and signals that the Bank of England sees enough inflationary pressure from energy prices to warrant tighter policy. The outlook depends heavily on whether the U.S.-Iran conflict is resolved and on the path of oil and natural gas prices.

Sources

• ft.com: Subscribe to read
• arkansasonline.com: Bank of England raises base interest rates to 4% | The Arkansas Democrat-Gazette - Arkansas' Best News Source
• finance.yahoo.com: Bank of England raises rates for first time since 2023, warns more likely
• cnbc.com: Bank of England hikes interest rates, warns inflation will near 5%

This article was drafted with AI assistance and checked against the sources above. Company claims are reported as claims. Cover image is AI-generated.