The Bank of England (BoE) raised its benchmark interest rate on Thursday, November 5, 2026, for the first time in over three years, lifting it to 4 per cent from 3.75 per cent. The Monetary Policy Committee (MPC) voted 8-1 in favour of the increase. The central bank warned that at least one more increase is likely if the US-Iran conflict continues, placing the UK on a path that its main peers, including the US Federal Reserve and the European Central Bank, had already embarked upon in response to inflation pressures linked to the Iran war, according to Reuters and The Business Times.
The BoE said that inflation pressure building from months of high energy prices required a rate rise now, even though higher borrowing costs will hit businesses and many homeowners. British inflation is likely to reach around 5 per cent in the middle of 2027, more than double the central bank’s target and a setback for Prime Minister Andy Burnham, who has sought to ease cost-of-living pressures. The BoE noted that there was little evidence so far of faster inflation outside sectors directly affected by higher energy costs.
In his opening remarks at the press conference, Governor Andrew Bailey said: “Today’s increase should not be seen as the first in an inevitable long sequence of hikes. That is not inevitable. But unless the conflict in the Middle East is resolved, neither does it seem likely to be the last increase.” Bailey also said a dip in oil prices over the previous 48 hours, largely driven by the results of the US midterm elections, was positive, but warned that “there is already a significant amount of inflationary pressure in the pipeline.” He added that the recent developments would not lead him to rule out further rate increases.
The decision was unanimous on the direction of policy but divided on its size. Catherine Mann, who had said in October that the BoE had been slow to reassure markets that it had a grip on inflation, voted for a half-point increase to 4.25 per cent. This was contrary to expectations in a Reuters poll, which had anticipated dissent from a policymaker seeking to hold rates steady.
Sterling strengthened against the US dollar after the decision, and two-year British government bond yields, which are sensitive to expectations of future rate moves, rose by five basis points. In the minutes of the November meeting, Mann said she was concerned about “non-linear inflation risks”, noting that consumer price inflation had risen to 3.5 per cent in September, a level she viewed as a potential trigger for a loss of confidence in the central bank. Deputy Governor Clare Lombardelli said a further rate hike was likely to be needed in the near term.
External MPC member Megan Greene spoke of a need for “further tightening”, while Chief Economist Huw Pill referred to “additional hikes”. Swati Dhingra and Alan Taylor, who had previously been reluctant to raise rates, said they would need stronger evidence of second-round effects before backing further tightening. Market pricing diverges from the central bank’s base case.
Before the decision, investors and financial markets had been almost certain of a rate rise this month, but they also priced in three quarter-point rate increases for 2027, more than most economists consider likely. Bailey said such differences reflected markets pricing in tail risks of a sharp further rise in energy prices, while economists’ expectations were based on the single most likely path, which involves a smaller amount of further tightening. In its central forecast, the BoE revised up its growth expectations to 1.6 per cent for 2026 and 1.3 per cent for 2027, notably stronger than the forecasts of the government’s Office for Budget Responsibility published last week.
The central bank attributed part of the upgrade to strong official data this year, spending on artificial intelligence, and a small, temporary boost from finance minister John Healey’s annual Budget. The BoE now expects inflation to peak at an average of 4.8 per cent in the second quarter of 2027. In a more adverse scenario, where oil prices peak at around US$130 a barrel compared with about US$100 currently, inflation would reach 6.2 per cent in the third quarter of 2027.
Under the central scenario, inflation is not expected to return to 2 per cent until the third quarter of 2028, six months later than the BoE projected in July, when forecasts were prepared during a lull in the US-Iran conflict that had lowered energy costs. The BoE also noted that after inflation and taxes, British households’ income from work is set to fall both this year and next. The Budget is expected to lower inflation by 0.25 percentage point at its peak, but to raise it later when temporary cost-of-living assistance expires.
Sources: Reuters, The Business Times, Bank of England Monetary Policy Committee statements and minutes as reported in the coverage. Economist and strategist comments attributed to Madison Faller, global investment strategist at JPMorgan Private Bank.
Source: businesstimes.com.sg