The Bank of England raised its key rate by 25 basis points to 4% on Thursday, its first increase since August 2023. The bank expects U.K. inflation to reach about 5% in mid-2027 as the Iran war pushes up energy prices, and Governor Andrew Bailey signalled more hikes could follow.
The Bank of England raised its key rate by 25 basis points to 4% on Thursday, its first rate hike in over three years. The Monetary Policy Committee voted 8 to 1 for the move.
The lone dissenter wanted more. Catherine Mann voted for a half-point increase to 4.25%, according to Reuters, rather than a vote to hold rates that a Reuters poll had anticipated.
Iran war lifts the inflation outlook
Policymakers said they now expect U.K. inflation to rise to about 5% by the middle of 2027. They pointed to the Middle East conflict, now in its ninth month, and to global energy prices that have kept rising from an already elevated level.
Annual inflation in the U.K. jumped to 3.5% in September, driven by the surging cost of motor fuels. The bank's forecasts show inflation peaking at an average 4.8% in the second quarter of next year, according to Reuters.
Bailey leaves the door open to more hikes
Bailey said that without news that softens the risks to inflation, he can see the argument for a further increase in rates. Reuters reported that Bailey said the hike should not be seen as the first in an inevitable long sequence, but that "neither does it seem likely to be the last increase" unless the conflict is resolved.
Before the decision, markets had been pricing in more than a 99% chance of a hike, according to LSEG data cited by CNBC, along with a one-in-four chance of another in December.
Gilt markets moved as well. The yield on the 2-year gilt rose by 4 basis points to 4.782%, while CNBC reported the British pound was flat against the U.S. dollar on Thursday afternoon.
Sources: CNBC, Reuters via Investing.com
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