By Salma El-Sakka
The Bank of England has raised interest rates to 4% and indicated that more increases are likely. The decision reflects a split on the nine-member Monetary Policy Committee: three members referred to "rises" in the plural, one voted for a double increase to 4.25%, and three, including Governor Andrew Bailey, pointed to just one more hike. The prevailing expectation is for a single further rise in February, after which the tightening cycle may pause.
Rate decision and committee split
The move is painful for borrowers on variable-rate mortgages, but officials stress it should not be seen as the start of a prolonged series of hikes. Predicting the trajectory of rates is described as highly uncertain, with expectations about the duration of the Iran war and its economic impact shifting daily.
Inflation and energy costs
The Bank's forecasts show inflation falling to just under 5% by next spring, even as a typical household energy bill is set to jump 27% in January to £2,150 a year. The rate increase aims to prevent high inflation from becoming entrenched in self-fulfilling price expectations, though such a spiral has not yet materialised.
Economic growth and currency
Underpinning the decision is stronger-than-expected UK economic performance. Growth reached 0.6% and 0.5% in the first two quarters of the year, with a projected 0.7% expansion in the third quarter before a slowdown. Unemployment has stabilised and edged lower. Sterling has risen to its highest level against a basket of currencies since the Brexit referendum, which helps curb inflation by making imports cheaper.
Outlook and uncertainty
The Bank has stopped waiting for the Iran war to end before acting, but the recent US midterm election results, which saw Democratic gains, may ease inflationary pressures. The central bank has thrown a "tentative first dart," with probably one more to come, conditional on the war continuing.
