By Fatma Younis
The Bank of England has raised its base interest rate to 4% from 3.75%, marking the first increase in more than three years. The Monetary Policy Committee (MPC) voted unanimously for the hike, though member Catherine Mann preferred a larger 0.5 percentage-point move.
Inflation Driven by Middle East Conflict
Governor Andrew Bailey said the decision was warranted by inflationary pressure from rising energy prices linked to the ongoing US and Israel conflict with Iran. He warned that unless the Middle East conflict is resolved, further rate increases are likely.
Energy and Food Price Pressures
The MPC expects inflation to accelerate before peaking around 5% in the second quarter of 2027, then fall to the 2% target by the third quarter of 2028. Household energy bills are set to jump nearly 25% to an average £2,150 in January, while food inflation could reach 4.8% next year due to higher energy costs and potential El Niño supply chain effects.
Growth Forecasts Revised
The Bank now projects UK growth of 1.6% this year, up from a previous 1.1% forecast, but sees growth slowing to 1.3% next year. Forecasts for 2028 and 2029 were downgraded as elevated inflation and interest rates weigh on demand. Budget measures such as removing VAT from household electricity bills may reduce inflation by 0.25 percentage points in the second quarter of 2027.
