The Bank of England announced on Thursday that it is raising its key interest rate by 25 basis points to 4%, marking its first rate hike in more than three years. The move had been widely anticipated by the market and represents the central bank's first increase since August 2023. Eight months after the United States and Israel went to war with Iran, the Bank of England has also become the last major central bank to begin a tightening cycle.
A majority of the Monetary Policy Committee backed the 25 basis point increase, with the vote splitting 8 in favor and 1 against. The dissenting member argued for raising the key rate by 50 basis points to 4.25%. In its statement on Thursday, the Monetary Policy Committee said: "The conflict in the Middle East has now entered its ninth month. Global energy prices have continued to climb from already elevated levels."
Policymakers said they now expect UK inflation to rise to "around 5%" by mid-2027. The committee said: "Thereafter, as the impact of higher energy prices on 12-month inflation data gradually fades and the relatively restrictive monetary policy weighs on inflation, inflation is expected to fall back."
According to data from the London Stock Exchange Group, market pricing before the rate decision showed a probability of more than 99% for a hike. Traders also predicted a one-in-four chance of another rate increase in December. Data released earlier this month showed that the UK's annual inflation rate jumped to 3.5% in September, driven by surging motor fuel prices. As a net energy importer, the UK is highly vulnerable to external energy shocks, as illustrated by the energy shock triggered by the Iran war this year.
Comments