The Bank of England has raised interest rates to 4% from 3.75%, marking the first increase in borrowing costs since August 2023. The move could put pressure on mortgage holders.
Inflation forecast raised
The central bank now forecasts that inflation will rise to a peak of around 5% next year, up from a previous prediction of 3.2%. The decision follows official figures showing the Consumer Prices Index (CPI) inflation rate rose to 3.5% in September, the highest level in 11 months.
The conflict in the Middle East has helped push CPI further away from the Bank's 2% target rate, with a surge in petrol and diesel prices a major driving force. Inflation is expected to rise further this winter after Ofgem's energy price cap rose by 3.6% for a typical household on October 1 and is forecast to jump by a further 22% in January.
Economists weigh in
Ellie Henderson, an analyst for Investec, said: "We imagine that many committee members' patience with the recent rise in inflation has worn thin." She added that "the longer energy prices remain elevated, the greater the risk that a temporary price shock becomes more permanent; a 'risk management' hike could guard against this." Henderson cautioned that producers might "not be willing or able to shoulder the burden of higher energy prices for much longer," which could push up prices in shops.
Alexander Harvey, UK economist for Oxford Economics, said: "So far, two factors have been central to the MPC's decision-making since the outbreak of the conflict in the Middle East: the scale and duration of the energy price shock, plus the extent of any second-round inflation effects from elevated energy prices. These factors will continue to dominate the outlook for Bank rate."
Market expectations and economic indicators
Harvey noted that the key thing economists will be looking out for is any signal from the Bank as to where interest rates could go from here, with financial markets expecting further hikes into 2027. Other central banks have already increased their rates, including the US Federal Reserve, which did so last month for the first time in three years.
The MPC also considered other economic indicators, including the UK's unemployment rate, which fell to 4.7% in the three months to August, the lowest level in more than a year. The economy also unexpectedly grew by 0.1% in August, suggesting resilience despite pressure on consumer spending and wider volatility due to the Iran war.
