Bank of England Lifts Rates to 4% and Warns More May Follow

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Mortgage borrowers face higher bills after the Bank of England moved its base rate to 4% from 3.75%. It is the first increase in three years, and governor Andrew Bailey signalled that a second one could come soon if the Iran war drags on.

What Bailey said

Bailey told the committee that without news easing the inflation risks, he could see the case for a further rise, followed by a more conditional approach. He also pushed back on market bets on a long run of hikes. He said this was not the start of a long run of hikes, but that unless the conflict is resolved, more than one rise looks likely.

At the press conference he welcomed the sharp drop in energy prices over the previous 48 hours. The fall would have to hold, he said, before it changed his view on future rises. A lot of inflationary pressure, he said, is already in the pipeline.

A committee that agrees on direction, not distance

Eight members of the monetary policy committee backed a quarter-point rise. The ninth, Catherine Mann, wanted half a point.

The minutes show how far apart the members are on what comes next. Alan Taylor, seen as dovish, called the move a "risk-management 'one-for-now' insurance hike". Mann argued that a bigger rise was needed to restore the Bank's inflation-fighting credibility.

Why the Bank expects prices to climb

Hopes of a deal to reopen the strait of Hormuz faded, and oil has sat above $100 a barrel for months. The Bank now forecasts UK inflation of 4.9% in the middle of next year, against 3.2% in its July projection. Consumer price inflation was 3.5% in September.

The committee points to costs passing from oil into the wider economy. It expects the Ofgem energy cap for an average household to go from the equivalent of £1,723 a year to £2,150 in January, then up again in April. Food price inflation could reach 4.75% by mid-2027.

Businesses have told Bank surveys they can absorb energy costs for now, for example through hedging. The committee expects that to end soon, with firms raising prices. It also worries that workers may press for large pay rises to make up for the cost of living.

Then came a turn in the other direction. Oil dropped below $100 after the Democrats' wins in the US Congress, a result some investors see as a brake on Donald Trump's room to keep the Iran war going.

The political backdrop

The decision lands a week after John Healey's first budget, which promised consumers some breathing space. The budget extended the fuel duty freeze and the VAT cut on electricity bills, and 20 million households will get a £100 energy payment. The committee reckons the package takes a quarter of a percentage point off inflation in mid-2027. It also expects real post-tax incomes to fall this year and next.

Healey said the Iran conflict is reaching deep into the pockets of families and businesses. Shadow chancellor Andrew Griffith called the rise another headwind for hardworking families.

The next decision

The Bank announces its next rate decision on 17 December. Some analysts think a hike before Christmas is possible. Andrew Goodwin, chief economist at Oxford Economics, said another rise in December or February is likely, given the inflationary pressure already in the system.

Source: The Guardian