Bank of England raises interest rate to 4% for first time since 2023

The Bank of England announced its first interest rate hike in over three years on Thursday, raising its key rate by 25 basis points to 4%.

Rate Increase and Inflation Forecasts

The Monetary Policy Committee voted to increase the Bank’s base rate from 3.75% to 4%, marking the first hike since July 2023. According to The Mirror, this move comes in response to sharply rising inflation, which currently stands at 3.5%.

The Bank forecast that inflation could surge from 3.5% to almost 5% by the middle of next year due to an energy shock caused by the conflict in the Middle East. If oil prices reach $130 a barrel, the Bank warned inflation could rise to more than 6%. Additionally, the Bank predicts food inflation will rise from just over 1% to 4.75% next year.

Impact on Borrowers and Savers

The rate hike affects different groups of consumers in various ways:

• Mortgage Borrowers: While 87% of the 8.47 million total mortgages are fixed, nearly one million borrowers on tracker mortgages or standard variable rates are likely to be affected. The average standard variable rate was 7.13% as of November 1.
• Savers: While higher rates can lead to better returns, Kevin Mountford, co-founder of Raisin UK, noted that "a change in bank rate does not automatically mean a better deal for savers" as it depends on whether banks pass the increase on to customers.
• Pensioners: Maike Currie from PensionBee noted that rising mortgage costs might tempt households to "reduce or pause pension contributions to free up cash today."

Economic Outlook

The Bank of England is predicting a slowdown in the UK economy, forecasting average growth of 1.6% this year will drop to 1.3% in 2027.

Regarding future policy, Bank of England Governor Andrew Bailey stated, “Today’s increase shouldn’t necessarily be seen as the first in an inevitable long sequence of hikes. But, unless the conflict in the Middle East is resolved, neither does it seem likely to be the last.”

Why it matters

The decision reflects the ongoing economic pressure from energy and food price volatility. Markets had been pricing in a greater than 99% chance of a hike according to LSEG data, and traders were pricing in a one-in-four chance of a further hike in December.

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Sources

• cnbc.com: Bank of England hikes for the first time since the Iran war, lifting interest rate to 4%
• mirror.co.uk: Interest rates raised by Bank of England - what it means for you - The Mirror

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