Bank of England raises Bank Rate to 4% as inflation heads towards 5%

The Bank of England raised Bank Rate by 0.25 percentage points to 4% on Thursday, with the Monetary Policy Committee voting by 8 votes to 1 and one member preferring a 0.5-point rise to 4.25%.

Bank Rate was 3.75% in July, when the committee voted 6 to 3 to hold it, with three members already favouring a move to 4%.

Governor Andrew Bailey said the increase “shouldn’t be seen as the first in an inevitable long sequence of hikes”, but added that it did not seem likely to be the last unless the Middle East conflict is resolved.

CPI inflation, the annual rise in consumer prices, was 3.5% in September, up from 2.6% in June, and is now expected to reach around 5% by the middle of next year.

The Bank expects inflation to fall after that as the effect of higher energy prices on annual rates fades and policy that it still judges restrictive bears down, towards a 2% target.

Brent crude and UK gas futures averaged $108 per barrel and 216 pence per therm over the 15 working days to 27 October, which was 38% and 81% above the levels at the time of the July report.

So far, the Bank said, there is little evidence of significant knock-on effects on other prices and wages, though it expects them to kick in eventually because energy costs have stayed high for long enough.

Those knock-on effects include so-called second-round effects, which arise when higher inflation feeds into the way firms set prices and wages and makes inflation longer lasting.

Pay is one of the things the committee is watching: private sector regular average weekly earnings growth was 3% in August, while the DMP business survey and the Indeed Wage Tracker suggest around 4%.

Bank staff judge underlying wage growth to be a little above the rate consistent with the 2% target, although they say there is uncertainty around that estimate.

The median respondent to the Bank’s Market Participants Survey expected Bank Rate to reach 4% in November and 4.25% in February, then to be 3.5% two and three years ahead.

The committee said policy is not on a pre-set path and that it will adjust Bank Rate as necessary to return inflation to 2% in the medium term.

Huw Pill, a member of the committee, said in the minutes that “a single 25-basis point hike is unlikely to be sufficient” and that more tightening, including in the near term, is likely to be required.

For households, mortgage approvals for house purchase fell 8% in the three months to September compared with the previous three months, reaching their lowest monthly level since 2023.

The ONS UK House Price Index fell 0.8% in the three months to August compared with the previous three months.

The unemployment rate is projected to stay broadly flat at 4.8% in the fourth quarter, and the Bank described the economy as more resilient than expected, which adds to the risk of higher energy costs spreading to other prices.

Firms have so far seen limited pass-through of wholesale energy costs, partly because more of them use fixed-price contracts and hedging than before the shock that followed Russia’s invasion of Ukraine.

The latest DMP survey suggests that firms facing higher costs have absorbed some of the rise by accepting lower margins, while committee members noted that growth in lending to businesses has remained strong.

The committee’s next decision is due on Thursday 17 December.