Bank of England raises rates for first time since 2023, warns more likely if Iran conflict continues
The Bank of England raised interest rates to 4 per cent on Thursday, its first hike in over three years, and warned further increases may follow if the US-Iran conflict persists. Governor Andrew Bailey said the move was not the start of an inevitable long sequence but unlikely to be the last unless
The Bank of England raised interest rates for the first time in over three years on Thursday and warned that at least one more increase was likely if the US-Iran conflict continues, as it started on a path that its main peers have already embarked on.
British inflation is likely to reach around 5 per cent in the middle of next year, the BoE said, more than double the central bank's target and a blow for new Prime Minister Andy Burnham who has sought to ease cost of living pressures.
While there was little evidence so far of faster inflation outside sectors directly affected by higher energy costs, the BoE said the amount of inflation pressure coming down the road from months of high energy prices required a rate rise now. "Today's increase shouldn't be seen as the first in an inevitable long sequence of hikes. But unless the conflict in the Middle East is resolved, neither does it seem likely to be the last increase," Governor Andrew Bailey said.
The central bank's Monetary Policy Committee voted 8-1 to raise rates to 4 per cent from 3.75 per cent, but the dissent came from a policymaker seeking a bigger hike. Catherine Mann, who said last month that the BoE had been slow to reassure markets, voted for a half-point increase to 4.25 per cent. Sterling strengthened against the US dollar after the decision and two-year British government bond yields rose by 4 basis points.
"Today's move still feels like a measured, credibility-preserving one rather than the start of an aggressive cycle. Inflation is elevated, but the evidence that it is broadening beyond energy remains mixed," said Madison Faller, a global investment strategist at J.P. Morgan Private Bank.
In its central forecast, the BoE revised up its expectations for growth this year and next to 1.6 per cent and 1.3 per cent. The upgrade follows strong official data this year, and the BoE attributed some of the strength to spending on artificial intelligence and to a small, temporary boost from finance minister John Healey's annual budget last week. But the BoE now sees inflation peaking at an average 4.8 per cent in the second quarter of next year. Under a more adverse scenario where oil prices peak at around US$130 a barrel compared to around US$100 currently, inflation hits 6.2 per cent in the third quarter of 2027.