By Basant El-Faramawy
The Bank of England has raised its base interest rate to 4% from 3.75%, the first increase in more than three years, and warned that further hikes are likely if the conflict involving Iran is not resolved.
Monetary Policy Committee Decision
All nine members of the Monetary Policy Committee voted for the increase, although Catherine Mann preferred a larger rise of 0.5 percentage points. The committee said action was needed to control rising inflation driven by the impact of the US and Israel's ongoing conflict with Iran on global energy and fuel prices.
Governor Warns of Further Hikes
Governor Andrew Bailey said inflationary pressure from higher energy prices warranted the increase, but stressed that today's move 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.
Impact on Households and Businesses
The MPC noted that many companies have so far absorbed higher energy costs into profit margins or hedged against spikes since the war began around nine months ago. However, it warned such buffers are temporary and cost pressures will eventually pass through to higher consumer prices if the energy shock persists, affecting food, drink and other goods.
Government Response
Chancellor John Healey said the Iran conflict is reaching deep into the pockets of families and businesses. He highlighted budget measures including a £100 energy payment for 20 million households, an extended tax cut on electricity bills, and a freeze on fuel duty.
Inflation and Growth Forecasts
The Bank expects inflation to continue accelerating, peaking around 5% in the second quarter of 2027 before falling to the 2% target by the third quarter of 2028. Ofgem is set to raise the household energy price cap by almost 25% to an average £2,150 annually in January. Food inflation may reach 4.8% next year. Despite inflation pressures, the UK economy has been more resilient than predicted, with growth forecast at 1.6% this year, up from a previous 1.1%, though forecasts for 2028 and 2029 were downgraded.
