Bank of England Raises Rates to 4% in First Increase Since 2023

Eight of the nine members of the Monetary Policy Committee voted for the quarter-point rise, according to the Bank's monetary policy summary and minutes. Catherine L Mann voted for a bigger increase of half a point, to 4.25%. Governor Andrew Bailey voted with the majority, along with Sarah Breeden, Swati Dhingra, Megan Greene, Clare Lombardelli, Huw Pill, Dave Ramsden and Alan Taylor.

The Committee said that "the degree of inflationary pressure in the pipeline is now sufficient to warrant an increase in Bank Rate." For businesses and households, borrowing gets more expensive just as the Bank expects inflation to climb further. Consumer price inflation was 3.5% in the year to September, up from 3.1% in August and well above the 2% target. The Bank's staff expect it to reach about 4.5% in the first quarter of 2027 and around 5% in the second quarter before it falls back.

The summary said that "global energy prices have continued to rise from an already elevated level" and that the conflict in the Middle East "is now in its ninth month." Lombardelli wrote that the conflict "has lasted longer than expected."

The Bank's rate had been cut from a 2023-24 peak of 5.25% and then held at 3.75% for six meetings in a row. At the September meeting the Committee voted 6-3 to hold, with the three dissenters favouring a rise.

AI also comes up in the Bank's reasoning. The minutes say economic activity has been stronger than expected, helped by export demand and AI-related investment, and they mention "some positive impact from the deployment of artificial intelligence." Dhingra described "an AI-driven sectoral and investment boost that presents two-sided risks to the inflation outlook." Members still judged that growth will probably slow somewhat in the coming quarters.

The Committee is split on what comes next. The Bank said policy is not on a pre-set path and will be decided meeting by meeting, and that it "will adjust Bank Rate as necessary to ensure CPI inflation returns to the 2% target in the medium term." According to the minutes, Lombardelli and Pill see a further near-term increase as likely, and Greene expects more rises, noting that underlying wage growth is "stuck around 3.5%." Taylor disagreed. "This is not the start of a hiking cycle," he said, adding: "The next move could be up, down, or sideways." Dhingra said she would need clear evidence of weaker price and wage pressures before backing a sustained higher rate.

The minutes record that the median market expectation is for Bank Rate to rise again to 4.25% in February. Members were briefed on the government's Budget on 28 October. Mann noted that the Budget measures would lower inflation by about a quarter of a percentage point by the second quarter of 2027.

The increase will reach some borrowers straight away. According to calculations by banking trade body UK Finance cited by the BBC, the UK's 510,000 tracker mortgage holders face an increase of about £31 a month on a typical loan. Holders of variable-rate mortgages will have to wait for their lenders to respond. Many fixed-rate lenders had already priced in the move. Moneyfacts put the average two-year fixed rate at 5.96% and the five-year rate at 5.99% as of 4 November.

The Committee's next decision is due on 17 December.