Macro
Bank of England Raises Rate to 4% in 8-1 Vote as Bailey Warns More Hikes Possible Unless Middle East Conflict Ends
Image: hslergr1 via Pixabay
The first increase since 2023 comes with a forecast that inflation will peak near 5% in mid-2027, and a dissenter who wanted a half-point move.
By Emmanuel Cruz ·
The Bank of England raised its benchmark interest rate on Thursday for the first time in more than three years, lifting Bank Rate by a quarter point to 4% from 3.75% as higher energy costs from the Iran war push inflation further above target. It is the first increase since August 2023, according to Euronews [1].
The Monetary Policy Committee voted 8-1. Reuters reported that the lone dissenter, Catherine Mann, wanted a larger half-point rise to 4.25%, citing what she called non-linear inflation risks. Reuters had expected any dissent to come from the opposite side, favoring a hold [2]. Markets had treated the November hike as almost certain, so the decision itself was largely anticipated and the focus was on guidance and forecasts [2].
Governor Andrew Bailey tried to avoid committing to a series of increases. He said the move "shouldn't be seen as the first in an inevitable long sequence of hikes," but added that unless the conflict in the Middle East is resolved, a further increase does not seem unlikely, according to both Euronews and Reuters [1][2]. The Associated Press quoted him saying the best thing that could happen is to resolve the conflict in the Middle East [3]. Deputy Governor Clare Lombardelli said a further hike is likely to be needed in the near term, and Megan Greene and Huw Pill called for further tightening, Reuters said. Swati Dhingra and Alan Taylor said they need stronger evidence of second-round effects before backing more increases [2].
The bank's projections underline why it moved. UK inflation was 3.5% in September, well above the 2% target. Reuters said the bank now sees inflation peaking at an average of 4.8% in the second quarter of 2027, with a figure of around 5% in mid-2027, and returning to 2% only in the third quarter of 2028 in its central case. In an adverse scenario in which oil climbs to roughly $130 a barrel, compared with about $100 now, inflation would reach 6.2% in the third quarter of 2027 [2]. Euronews added that the bank expects the government's Budget to trim inflation by about a quarter of a point by the second quarter of 2027 [1].
Growth forecasts were raised, which complicates the picture. The bank now expects the economy to grow 1.6% in 2026 and 1.3% in 2027, up from 1.1% for both years in its July projections [1][2]. Reuters noted that household income from work is still expected to fall in both years after inflation and taxes [2].
For households, the impact runs through borrowing costs. Euronews reported that two-year mortgage rates have risen by almost half a percentage point since early September and that market rates remain above their pre-conflict levels. Ellie Henderson of Investec warned that the longer energy prices stay elevated, the greater the risk that a temporary price shock becomes more permanent [1].
Markets had priced a move to 4% in November and 4.25% in February, according to Euronews, while Reuters said traders had built in three quarter-point hikes for 2027, more than most economists expect [1][2]. That gap is likely to be the next test: if Thursday's cautious guidance is read as a pause, rate expectations could be pared back; if oil prices rise again, the market view could harden.
What to watch next includes UK inflation data, the course of oil prices and the Strait of Hormuz, the government's Budget, and the Bank's next decision, where the split between hawks and those wanting more evidence will again be on display. Reports in the sources did not give a post-decision reaction for gilts or sterling, so that remains to be seen.
Sources:
[1] Euronews, "Bank of England raises key interest rate for first time in over 3 years", November 5, 2026. https://www.euronews.com/2026/11/05/bank-of-england-raises-key-interest-rate-for-first-time-in-over-3-years
[2] Reuters (via Business Standard), "Bank of England raises rates for first time since 2023, says more may come", November 5, 2026. https://www.business-standard.com/amp/world-news/bank-of-england-raises-rates-for-first-time-since-2023-says-more-may-come-126110501662_1.html
[3] The Associated Press (via Dayton Daily News), "A wipeout for AI stocks sends Wall Street reeling, and the S&P 500 tumbles more than 3%", November 5, 2026. https://www.daytondailynews.com/nation-world/more-drops-for-nvidia-and-other-ai-chip-stocks-erase-wall-streets-rally-from-the/article_3e7a30c6-65f2-502d-8196-1c4fb4317c85.html
This article was produced with AI assistance. It is for informational purposes only and is not financial advice. StockVolt and its authors may hold positions in securities mentioned.