Interest Rates Hiked in First Increase in Over Three Years
Interest rates have risen for the first time in more than three years, and the Bank of England has signalled that a further increase is likely unless the US-Iran war is resolved. Rates rose to 4% from 3.75% in a bid to curb inflation,n mainly driven by the conflict’s impact on global oil prices.
Andrew Bailey, the Bank’s governor, said the decision “shouldn’t be seen as the first in an inevitable long sequence of hikes”, but warn,ed “unless the conflict in the Middle East is resolved, neither does it seem likely to be the last increase”.
The higher level will increase the cost of borrowing for things such as mortgages, loans and credit cards, but will also lead to higher returns on savings.
The Bank’s rate-setting committee backed raising interest rates, with eight of nine voting in favour of the rise to 4%. One member wanted an even bigger increase to 4.25%.
Bailey said the hike was warranted because of higher energy prices and pointed to developments in the Middle East as the main factor in future decisions.
“Put simply, it requires real progress towards settling the conflict in the Middle East,” the governor said.
Bailey said he could “see the argument” for a further rate hike, before taking a “more conditional approach” dependent on the path of energy prices and inflation in the coming months.
However, members of the rate-setting committee differed on the path forward.
Clare Lombardelli agreed there was “likely to be a case for a further increase in rates in the near term”. At the same time, Megan Greene went further, suggesting “additional hikes” might be likely depending on how inflation impacted wages, prices and the jobs market.
However, Alan Taylor said the rate rise was a “a risk-management ‘one-for-now’ insurance hike”.
Inflation, which measures the pace of price rises over time, is well below its peak of a few years ago but remains above the Bank of England’s 2% target and is expected to increase further next year.
Prices rose 3.5% in the year to September 2026, largely due to higher fuel prices. Millions of households are also set to face higher energy bills in January.
Higher fuel prices can push up prices for a host of goods and staples as businesses pass higher costs on to customers.
But the Bank said there was “limited evidence” this had happened so far for goods, such as food, with some firms absorbing cost increases and accepting lower margins.
He said further increases in energy prices are putting upward pressure on inflation and “that’s what we have to seek to lean against”.