Bank raises Bank Rate to 4 per cent to stop energy prices becoming embedded in inflation
The Monetary Policy Committee voted by eight votes to one to add a quarter of a percentage point to Bank Rate, judging that the pressure building from higher energy prices now requires tighter policy even though knock-on effects on other prices and wages remain limited so far.
Bank Rate has been increased to 4 per cent. The Bank of England's Monetary Policy Committee voted by eight votes to one at its meeting ending on 4 November to add a quarter of a percentage point, and the decision was published on Thursday. One member wanted a larger move. The Committee judged that the amount of inflationary pressure now in the pipeline is sufficient to warrant tighter policy, and that recent economic activity, which has been stronger than expected, adds to the case.
The cause sits outside Britain. The conflict in the Middle East is in its ninth month, and global energy prices have risen further from an already elevated level since the Bank's July Report. Consumer price inflation reached 3.5 per cent in September. On the Bank's central projection it rises to around 5 per cent by the middle of next year, averaging 4.9 per cent in the second quarter of 2027, before falling as the effect of energy prices on twelve-month inflation rates fades and a still restrictive policy stance bears down. Inflation is expected to return to the 2 per cent target in the third quarter of 2028.
The Committee was explicit about what it has not yet seen. Nobody on it doubts that dearer energy is pushing up fuel prices and utility bills directly, and that channel will keep operating, but evidence that the shock is spilling over into other prices and into wages remains limited. Firms have absorbed some higher costs in lower margins, and fixed price contracts and hedging have delayed the pass-through of wholesale prices for some. The Bank's judgement is that those buffers are likely to prove temporary, and that underlying domestic pressures have stopped easing: services price inflation was 3.7 per cent in September, and measures of underlying services inflation have been broadly flat in recent months at around 4 per cent.
There is now enough inflationary pressure in the pipeline caused by the rise in energy prices that an increase in Bank Rate is warrantedAndrew Bailey, Governor of the Bank of England
The prices behind that judgement have moved a long way. Over the fifteen working days to 27 October, the front month Brent crude futures price averaged 108 dollars a barrel and the UK front month natural gas price averaged 216 pence a therm, respectively 38 per cent and 81 per cent higher than at the time of the July Report. The Ofgem price cap rose to 1,723 pounds in the fourth quarter of 2026 and is expected to reach around 2,150 pounds in the first quarter of 2027, even after allowing for the temporary removal of VAT on household electricity bills. Direct energy effects contributed around one percentage point of September's 3.5 per cent inflation rate, most of it from motor fuels.
The eight members who backed the quarter point increase were Andrew Bailey, Sarah Breeden, Swati Dhingra, Megan Greene, Clare Lombardelli, Huw Pill, Dave Ramsden and Alan Taylor. Catherine L Mann voted against, preferring an increase of half a percentage point to 4.25 per cent. The minutes record her reasoning in terms of risk management and credibility: she favoured moving harder now to stop inflation settling in for the long term, warning that price setting and wage bargaining could shift abruptly once certain thresholds are crossed. No member voted to leave Bank Rate unchanged.
Andrew Bailey, the Governor, said: "There is now enough inflationary pressure in the pipeline caused by the rise in energy prices that an increase in Bank Rate is warranted." He added: "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." The Committee, he said, will judge the outlook at each meeting and respond as necessary to bring inflation sustainably back to the 2 per cent target.
The wider economy gave the Committee room to act, and households are already feeling the tightening. Gross domestic product grew by 0.5 per cent in the second quarter, and Bank staff expect growth of 0.7 per cent in the third, far above the 0.3 per cent and 0.1 per cent the July Report had projected for those quarters. Business investment grew by 1.8 per cent in the second quarter after growth of 3 per cent in the first, and unemployment stood at 4.7 per cent in the three months to August. Against that, mortgage approvals for house purchase fell by 8 per cent in the three months to September, reaching their lowest monthly level since 2023, typical two year mortgage rates were almost half a percentage point higher than at the start of September, and house prices fell by 0.8 per cent in the three months to August.
What happens next is deliberately unscripted. The Bank says monetary policy is not on a pre-set path, and that it will watch how high energy prices feed through by monitoring pay, pricing behaviour and slack in the economy. Its projections take account of the Budget of 28 October, whose new measures it expects to reduce consumer price inflation by a quarter of a percentage point by the second quarter of 2027, with a small effect on activity. The next decision is due on 17 December 2026.
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