The Bank of England has raised interest rates for the first time in three years and warned of another increase to combat inflationary pressure unleashed by the Iran war. Eight members of the Bank’s monetary policy committee (MPC) voted for the rise, which takes the base rate from 3.75% to 4%. The ninth member, Catherine Mann, preferred a more dramatic half-point increase.
The Middle East conflict has pushed oil prices persistently above $100 a barrel in recent months, as hopes have evaporated of a deal that could reopen the strait of Hormuz. As a result, the Bank now expects UK inflation to rise to 4.9% in the middle of next year – up from 3.2% in its last economic forecast in July. Inflation hit 3.5% in September, as measured on the consumer prices index.
The decision, which will hit mortgage borrowers, comes a week after John Healey used his first budget to promise “breathing space” for hard-pressed consumers. Echoing the Office for Budget Responsibility’s gloomy forecasts for living standards, the MPC expects real post-tax income to fall this year and next. The Bank’s governor, Andrew Bailey, raised the prospect of another rate rise in the near future – with a resolution to the Iran conflict the key factor that will influence the decision.
However, he played down the likelihood of a prolonged series of increases, as markets have been predicting. But unless the conflict in the Middle East is resolved, neither does it seem likely to be the last increase,” he said. The Bank’s next interest rate decision will be announced on 17 December, and some analysts suggested the MPC could press ahead with a pre-Christmas hike.
Andrew Goodwin, the chief economist at consultancy Oxford Economics, said: “The degree of inflationary pressure already in the system means another hike in December or February is likely.” Explaining its decision to raise borrowing costs, the MPC highlighted the pass-through from elevated oil prices to business and consumer costs across the economy. It expects the Ofgem energy cap to rise from the equivalent of £1,723 a year for an average household in Great Britain to £2,150 in January and to increase again in April. Food price inflation could hit 4.75% by mid-2027, it warned.
Businesses have so far reported in the Bank’s surveys that they have been able to absorb soaring oil and gas prices – by hedging their energy costs, for example – but the MPC believes they will soon have to start passing them on to consumers in higher prices. It is also concerned about workers seeking to offset the impact of the higher cost of living by asking for bumper pay rises. Oil prices have fallen sharply, to below $100 a barrel, after the Democrats’ victories in the US Congress, which some investors have interpreted as potentially constraining Donald Trump’s capacity to prolong the conflict in Iran.
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