On November 5, the Bank of England announced it would raise its benchmark interest rate by 25 basis points to 4%, in line with market expectations, marking the first rate hike in more than three years.
The Monetary Policy Committee approved the decision by a vote of 8 to 1, with the sole dissenting member advocating for a 50 basis point increase to 4.25%.
The Bank of England said that current inflationary pressures have reached a level requiring further monetary tightening, while UK economic activity has performed more strongly than expected, lending support to the rate increase.
The Bank of England noted that the nine-month-long US-Iran war has driven up energy prices, pushing the UK's September inflation rate to 3.5%, an 11-month high and significantly above the 2% policy target.
The central bank expects that rising energy costs will continue to pass through to businesses and households, with UK inflation potentially rising to around 5% by mid-2027 before gradually declining as the energy price impact fades and tightening monetary policy takes effect.
The Bank of England said that although signs of the energy price shock feeding into broader prices and wages remain limited, underlying inflationary pressures are sufficient to support a rate hike.
Future monetary policy has no preset path, and the central bank will adjust interest rates based on the inflation outlook to ensure inflation returns to the 2% target over the medium term.
Paul Dales, Chief UK Economist at Capital Economics, believes the hawkishness of this rate decision slightly exceeded market expectations, indicating that the Bank of England's current tightening cycle may not be over and that another rate hike could come as soon as December.
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