The Bank of England Raises Rates for the First Time Since 2023
Britain's central bank lifted its rate to 4% and warned that inflation will rise further before it falls. One policymaker wanted a bigger move. The decision shows how the oil shock is reversing the global rate-cutting cycle.
The Bank of England raised its benchmark Bank Rate by a quarter point to 4% on Thursday, its first increase in more than three years. Eight of the nine members of its Monetary Policy Committee voted for the move. The ninth, Catherine Mann, wanted a larger half-point increase to 4.25%.
Governor Andrew Bailey said the hike “should not be seen as the first in an inevitable long sequence of hikes.” But he also said there is “a significant amount of inflationary pressure in the pipeline,” and that another increase is likely in the near term unless the evidence changes.
Why Britain is raising rates
The reason is energy. The war with Iran has pushed oil to around $100 a barrel for much of the autumn, and Britain imports much of its energy. UK consumer price inflation reached 3.5% in September.
The Bank’s new forecasts show it getting worse before it gets better:
| Bank of England forecast | |
|---|---|
| Peak inflation | about 4.8% in the second quarter of 2027 |
| Return to the 2% target | third quarter of 2028 |
| Adverse scenario (oil near $130) | inflation reaching 6.2% |
| GDP growth, 2026 | 1.6% |
| GDP growth, 2027 | 1.3% |
The return to target is now six months later than the Bank expected in July. Growth forecasts were revised up, which the Bank credited partly to AI-related investment. But after inflation and taxes, household income from work is expected to fall in both years.
The real worry: “second-round effects”
A central bank can’t do much about the first effect of an oil shock: fuel and heating get more expensive. What it tries to prevent are second-round effects, when workers demand higher wages to keep up with prices, and businesses raise their own prices to cover higher costs. That’s how a one-time energy shock becomes lasting inflation.
The committee is divided on how far that process has gone. Mann cited “non-linear inflation risks,” meaning inflation could accelerate suddenly once expectations shift. Several members called for further increases. Others, including Swati Dhingra and Alan Taylor, want clearer evidence of second-round effects before going further.
Markets expect more
Financial markets had almost fully expected Thursday’s hike. They are pricing roughly three more quarter-point increases in 2027, more than most economists forecast. Bailey said the gap reflects markets pricing the risk of a sharp energy spike, while economists assume a more modest path. Two-year UK government bond yields rose about 5 basis points, and the pound strengthened against the US dollar.
Oil has fallen sharply this week on hopes of a US–Iran deal, and Bailey called the decline “encouraging.” If it lasts, the case for further hikes weakens. If it reverses, the adverse scenario becomes more relevant.
A global turn
The Bank of England is now part of a broader shift. The Federal Reserve and the Bank of Canada have both raised rates into the oil shock, and markets see a high chance of another Fed increase in December. After years in which the main question was when rates would fall, central banks are back to fighting inflation.
What it means for borrowers and savers
- Borrowers with variable-rate loans and mortgages that are up for renewal will pay more. The same pressures are pushing up borrowing costs in Canada and the US.
- Savers benefit from higher rates on deposits and short-term bonds, though inflation is eating into those gains.
- Investors should note that higher rates tend to weigh hardest on highly valued growth stocks, whose value depends on profits far in the future. That’s one of several reasons tech stocks have struggled this week.
Our guide to reading a central bank decision explains what to look for in statements like Thursday’s.