Macro
Bank of England Set to Raise Rates to 4% in First Hike in Three Years as Energy Costs Lift Inflation
Image: KaiPilger via Pixabay
Economists expect a split vote at noon London time, with markets already pricing further increases in 2027.
By Emmanuel Cruz ·
The Bank of England is due to announce its interest rate decision at noon London time on Thursday, and economists widely expect the Monetary Policy Committee to raise Bank Rate by a quarter point to 4% from 3.75%. Such a move would be the central bank's first increase since August 2023 and its first change of any kind since a cut last December, according to Reuters [1].
The vote itself is likely to show a divided committee. Economists polled by Reuters expect a 7-2 majority in favour of a hike, while Deutsche Bank is forecasting 6-3 [1][2]. At the September meeting, the committee voted 6-3 to leave rates unchanged [1]. A larger majority for a rise would signal that the group has moved more firmly toward tightening than it was only two months ago.
The case for acting rests on inflation. Consumer price inflation rose to 3.5% in September, well above the 2% target and above the 3% the Bank had projected in late July, and Reuters noted that inflation has been above target for almost all of the past five years [1]. The wire service described oil as being around $100 a barrel and natural gas prices as roughly triple their level before the conflict that has disrupted energy markets [1].
Against that, the UK economy has been growing. Reuters reported that August GDP showed the biggest annual rise since 2022 and that the country had the joint-fastest growth in the G7 in the first half of the year [1]. Businesses are forecasting annual pay settlements of around 3.5% next year, similar to 2026, and the report said there are few signs so far of significant second-round effects from higher energy costs [1].
Governor Andrew Bailey has argued that firms are absorbing more of the cost increases than they did in 2022, when inflation reached 11%. He has also pointed to a sharp rise in market interest rates after the conflict began, which pushed up UK mortgage rates more than elsewhere, as a reason the Bank held off in September [1]. Reuters said Finance Minister John Healey's first budget, published last week, did little to change the outlook for growth or inflation [1].
The bigger question for markets is what comes after Thursday. Investors are pricing at least three further quarter-point rises next year on top of one this month, Reuters reported [1]. Committee member Catherine Mann has worried that part of the jump in rate expectations reflects concern that the Bank could lose control of inflation, while PIMCO economist Peder Beck-Friis expects one more increase in February followed by a long pause [1]. Any pushback from the Bank against the market's more aggressive path would be one of the main things traders look for in the statement and Bailey's press conference.
For households, the effect depends on the type of loan. Tracker mortgages linked to Bank Rate would see repayments rise straight away, while fixed-rate borrowers would feel it only when they remortgage, and lenders may already have built much of the increase into their pricing through swap rates [2]. Suren Thiru of the ICAEW called a rise to 4% "all but certain" [2]. Savills expects Bank Rate to reach 4.25% by the end of 2027 and UK house prices to fall about 1.5% next year [2]. Residential transactions slipped 1% in September to 94,800, down 4% from a year earlier [2].
What to watch: the exact vote split, the Bank's updated inflation forecasts, and whether policymakers describe further tightening as likely or merely possible. Sterling and UK government bond yields are the markets likely to react to any surprise in either direction.
Sources:
[1] Reuters (via RTÉ), "Bank of England set to hike rates for 1st time in 3 years", November 5, 2026. https://www.rte.ie/news/business/2026/1105/1598072-bank-of-england-rates-meeting/
[2] Property Industry Eye, "Estate agents brace for fresh mortgage blow as Bank of England rate decision looms", November 5, 2026. https://propertyindustryeye.com/estate-agents-brace-for-fresh-mortgage-blow-as-bank-of-england-rate-decision-looms
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.