The Bank of England has raised interest rates to four per cent as all policymakers agreed to tighten monetary policy in a bid to stop inflation from spiralling in the next year. 

The Bank’s Monetary Policy Committee hiked interest rates for the first time since mid-2023, with policymakers warning another hike could come in upcoming meetings. One rate-setter, Catherine Mann, voted to raise interest rates by 50 basis points in order to maintain credibility. 

The country’s most senior group of economists agreed that inflation could hit 4.9 per cent in the middle of next year. 

Governor Andrew Bailey indicated that today’s hike may not be the last amid concerns that a long war in the Middle East between the US and Iran could push prices higher.

“There is now enough inflationary pressure in the pipeline caused by the rise in energy prices, that an increase is warranted,” Bailey said. 

“Today’s increase shouldn’t be seen as the first in an inevitable long sequence of hikes. But, unless the conflict in the Middle East is resolved, neither does it seem likely to be the last increase”. 

Inflation spike forces Bank to act 

An acceleration in price growth over the next year would leave the Bank further away from its two per cent inflation target. 

The Bank’s main forecast suggests that inflation will only fall back to the target rate in late 2028. 

In the worst case that oil prices were above $100 (£74.3) per barrel for the next two years, inflation could hit 6.2 per cent while further interest rate hikes would be more likely. 

Rate-setters were more optimistic about the outlook for growth than several other forecasters, predicting that the UK economy would grow by 1.6 per cent this year and 1.3 per cent next year. However, the policy report warned that expected tax hikes kicking in from 2027 would weaken output. 

But Bailey told reporters that the UK’s growth “was not broad based”, and was instead largely down to white-collar industries’ rapid adoption of artificial intelligence.

“Just under a fifth of GDP [gross domestic product] growth this year has been accounted for by AI related activity,” he said, adding that policymakers were seeing an uptick in investment and usage.

“That doesn’t seem to me all that is surprising to the extent that there’s also an AI story in there,” Bailey said. “I think the first thing you’d expect to see in terms of this general purpose technology cycles is what you might call capital deepening of the sort that will then hopefully then lead to broader based productivity growth.”

According to the Bank, measures related to energy prices in the Budget will not lower inflation next year by more than 0.3 percentage points next year. 

Bailey signals one further interest rate hike

Markets had predicted that at least one policymaker would vote for interest rates to be held. Alan Taylor, the MPC member who was seen as the most likely dissenter against a hike, referred to the latest decision as “insurance”. 

Bank members suggested that there was little evidence of second round effects in the UK economy, the event where higher inflation prompts workers to demand higher wages, pushing up price pressures across the country. 

But the MPC concluded there was “pressure in the pipeline” as higher costs were set to feed into the price of goods around the world. Bailey said one further hike was on the horizon if inflationary pressures did not immediately ease. 

Since the US mid-terms, oil prices have fallen by more than seven per cent as President Trump is facing considerable pressure to bring his war with Iran to a close. The Bank’s forecast did not take account of the latest market pricing, with judgements made based on data up until late October. 

The main report also warned that, as a result of higher interest rate expectations, annual average mortgage payments are likely to be about £1,500 higher by the 2029 than had been predicted before the war in the Middle East.