BoE raises interest rates to 4% as Iran war fuels inflation

The Bank of England raised interest rates by 25 basis points to 4% on Thursday, November 5, its first increase since August 2023, as policymakers moved to contain inflationary pressures stemming from the war in Iran and elevated energy prices.

The widely expected decision ended a prolonged period of unchanged borrowing costs, although the central bank stopped short of signaling a sustained tightening cycle.

Interest rate decision

The Monetary Policy Committee voted 8-1 to increase the benchmark rate from 3.75% to 4%.

Eight members supported the quarter-point increase, while one favored a larger 50-basis-point rise to 4.25%.

The decision reflected growing concerns that higher energy costs could feed into domestic prices and wages, making inflation more difficult to control.

Inflation expected to reach 5%

British consumer price inflation accelerated to 3.5% in September, remaining well above the central bank's 2% target.

The Bank of England now expects inflation to reach approximately 5% by mid-2027, driven largely by higher global energy prices.

However, policymakers acknowledged that evidence of broader inflationary pressures spreading into wages and other prices remains limited.

Economic resilience strengthens case for tightening

The central bank also pointed to stronger-than-expected economic activity in recent months, providing additional justification for higher borrowing costs.

Nevertheless, further increases could weigh on household spending and business investment, particularly as mortgage costs remain elevated.

Further rate increases remain uncertain

The Bank of England emphasized that monetary policy would not follow a predetermined path, with future decisions depending on inflation, wage growth and economic conditions.

Recent declines in oil prices have raised hopes that inflationary pressures could ease if tensions in the Middle East subside.

The next policy decision is scheduled for December 17, when policymakers will reassess whether additional tightening is necessary to return inflation toward the 2% target.