The Bank of England is expected to raise interest rates on Thursday for the first time in more than three years as it seeks to contain rising inflation driven by the Iran war.
Economists expect the bank’s nine-member Monetary Policy Committee to increase its key interest rate by 0.25 percentage points to 4% from 3.75%. The move would be the first rate hike since August 2023.
Pressure on policymakers has mounted after inflation climbed to an 11-month high of 3.5% in September, well above the bank’s 2% target. Markets are also anticipating further increases in 2027 as inflation is expected to rise in the coming months.
The main driver of the recent inflation surge has been higher fuel costs following the Iran war and disruptions to shipping through the Strait of Hormuz, which have tightened global oil and gas supplies.
“We imagine that many committee members’ patience with the recent rise in inflation has worn thin,” said Ellie Henderson, an economist at Investec. She warned that prolonged high energy prices could turn a temporary price shock into a more lasting problem.
The expected rate increase will be accompanied by the bank’s quarterly economic forecasts, including projections for inflation and economic growth. Higher borrowing costs are intended to curb spending and inflation, but they can also slow economic growth.
However, the outlook remains highly uncertain, largely because of developments surrounding the Iran war.
Energy prices have fallen sharply following the Republican Party’s heavy losses in the US midterm elections. If oil and gas prices remain lower in the coming weeks, the expected peak in inflation could be less severe, potentially reducing pressure for further rate hikes.
The US Federal Reserve and the European Central Bank have also raised interest rates recently in response to inflationary pressures linked to the war, with their future policy decisions largely dependent on energy prices.
UK interest rates had been falling from a 15-year high of 5.25% before the United States and Israel attacked Iran on February 28.