The Bank of England is expected to raise its Base Rate to 4% from 3.75% at noon, a move that would mark the first increase since August 2023 and a fresh blow for millions of mortgage holders.
The Monetary Policy Committee (MPC) is widely predicted to deliver a quarter-point hike, driven by inflationary pressures stemming from conflict in the Middle East. The Base Rate significantly affects the cost of mortgages and loans, as well as the interest rates banks offer on savings accounts.
Inflation remains above target
The Base Rate peaked at 5.25% in late 2023, but policymakers have since reduced it as inflation dropped to more manageable levels. The UK's Consumer Price Index (CPI) inflation rate jumped to 3.5% in September, far lower than the 11% highs seen during 2022's energy crisis but still above the Bank's 2% target.
The Bank of England typically raises interest rates when inflation is high to curb spending and slow price increases. The Bank has held its Base Rate at 3.75% since December 2025.
Conflict in the Middle East shifts expectations
Markets had previously priced in at least two rate cuts for 2026, but expectations shifted after the US and Israel launched an attack on Iran in February. The resulting conflict caused significant disruption around the Strait of Hormuz, which carries around a fifth of the world's oil and gas, rattling energy markets and reigniting inflationary pressures.
Financial markets are now anticipating a rate hike today, along with three more in 2027. Matthew Ryan, head of market strategy at global financial services firm Ebury, said: "Sterling enters into Thursday's Bank of England meeting in a strong position as markets bet on a rate rise this week and three further hikes in 2027.
"We agree that a 25bp hike is on the way, though we expect it to come in a divided vote. Inflation has overshot the bank's forecasts, while activity has proved more resilient than expected and the jobs market is showing early signs of bottoming out."
Balancing inflation and growth
Chris Cheverall, head of UK at CMC Markets, believes what comes further down the line matters much more than Thursday's expected rise. He said: "[Today's] Bank of England decision is increasingly less about whether rates reach 4% and more about what follows after that.
"A quarter-point rise is already widely expected, but the Bank now has to balance inflation that is still too high against an economy where the growth outlook has weakened sharply.
"Since the Bank last met, inflation has risen to 3.5%, and services inflation has moved up too, making it harder to treat the inflation problem as purely an energy story. At the same time, the OBR has cut its growth outlook for next year, while consumer demand remains fragile. The tricky part for the Bank is that tackling inflation more aggressively could put further pressure on an economy that is already losing momentum."
