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, and signaled further hikes are likely if the conflict in the Middle East persists.
MPC Unanimous on Hike, One Member Favored Larger Increase
The Monetary Policy Committee voted unanimously for the 0.25 percentage point rise, though member Catherine Mann preferred a 0.5 point increase. The committee cited rising inflationary pressure from higher global energy and fuel prices linked to the US and Israel's ongoing conflict with Iran.
Governor Warns of Further Increases Unless Conflict Resolved
Governor Andrew Bailey said the increase was warranted by inflationary pressure in the pipeline from energy prices, but stressed it should not be seen as the start of an inevitable long sequence of hikes. He added that unless the Middle East conflict is resolved, further increases seem likely.
Inflation Expected to Peak at 5% in 2027
The Bank expects inflation to accelerate in coming months, peaking around 5% in the second quarter of 2027 before falling to the 2% target by the third quarter of 2028. Household energy bills are set to drive inflation, with Ofgem expected to raise the price cap by nearly 25% to an average £2,150 annually in January.
Food Inflation and Supply Chain Pressures Loom
Food inflation could reach 4.8% next year due to higher energy costs for manufacturers and potential supply chain pressures from El Niño. The Bank noted that companies have so far absorbed higher energy costs, but warned such buffers are temporary.
Economy Shows Resilience, Growth Forecasts Revised
Despite the inflation outlook, the UK economy has shown resilience, with growth forecast at 1.6% this year, up from a previous 1.1% estimate, partly driven by higher business investment linked to AI. Growth is seen slowing to 1.3% next year, still above July's 1.1% projection, though forecasts for 2028 and 2029 were downgraded.
Budget Measures to Provide Modest Inflation Relief
Government measures in last week's budget, including removing VAT from household electricity bills, are expected to reduce inflation by about 0.25 percentage points in the second quarter of 2025.
