Source: Sharecast
The Monetary Policy Committee voted by a majority of 8-to-1 to hike Bank Rate by 25 basis points to 4%, in wake of mounting inflation, as widely expected. Catherine Mann was the lone dissenting voice, arguing instead for a steeper 50 basis point hike.
At the start of 2026, the BoE had been widely expected to cut rates throughout the year. But the outbreak of war in the Middle East in early spring threw global energy markets into turmoil and has sent inflationary pressures climbing once more.
The consumer price index currently stands at 3.5%, primarily due to the soaring cost of fuel. The BoE’s long-term target for inflation is 2%.
In the accompanying minutes, the MPC noted that CPI was set to rise to "around 5%" by the middle of next year before falling back as the impact of raising energy prices on the 12-month rate fades.
It acknowledged that while energy bills were notably higher, they currently remained “limited evidence” of knock-on effects on other prices and wages. But it concluded: “The degree of inflationary pressure in the pipeline is now sufficient to warrant an increase in Bank Rate. Monetary policy is not a pre-set path. The committee will continue to assess the evidence at each meeting, in particular how likely high energy prices are to feed through to other prices and the economy more broadly.”
With the US-Iran war still ongoing, markets are currently pricing in three further rate hikes.
Neil Wilson, UK investor strategist at Saxo, said the committee-wide agreement on rising Bank Rate was “more hawkish than expected”, and contributed to a jump in sterling and front-end gilt yields following the announcement. He also flagged growing consensus for the next hike coming potentially as soon as December. “The problem is that the longer headline inflation stays high while the economy is resilient, the higher the risk of second-order effects.”
Susannah Streeter, Wealth Club’s chief investment strategist, said: “Although growth has slightly surprised on the upside this year, and the latest PMI manufacturing snapshot showed a greater uptick in activity than expected, growth is already expected to slow next year. So these forecasts do look overblown, and much will depend on the trajectory of the Middle Eats conflict.”
The Confederation of British Industry said: “The question now is where the committee goes from here. Persistently high inflation means another rate rise cannot be ruled out. That could prove challenging, with interest rates already weighing on economy activity, while tighter financial conditions are doing some of the BoE’s work for it.
“Either way, households and businesses face higher borrowing costs in the near term. That’s a bitter pill to swallow.”
The last time the BoE increased interest rates was in August 2023, when inflation was more than 6%.