The Bank of England is poised to raise interest rates on Thursday for the first time since August 2023, a move that would lift its key Bank Rate from 3.75% to 4%. The decision comes as energy prices, fueled by the US-Iran conflict, keep inflation above the Bank's target and force policymakers to act.
Economists polled by Reuters expect the Bank's Monetary Policy Committee (MPC) to vote 7-2 in favor of the increase. The vote would mark a clear shift from September's meeting, where the committee voted 6-3 to hold rates steady, a closer call than many had anticipated.
Why is the Bank hiking now?
The primary driver is inflation. UK inflation rose to 3.5% in September, well above the Bank's 2% target and higher than the Bank projected in late July. Much of this overshoot stems from energy costs: oil has hovered around $100 a barrel, and natural gas prices remain far above pre-conflict levels. These higher costs are feeding directly into household bills and business expenses.
So far, the spillover into wages appears limited. Businesses expect annual pay settlements of about 3.5% next year, according to the brief. But the Bank worries that sustained high fuel and utility bills could eventually push broader prices and wages higher, creating a more persistent inflation problem.
The economy has also held up better than expected, giving the Bank room to tighten policy without fear of triggering an immediate downturn. That resilience, combined with the inflation overshoot, has shifted the balance toward action.
Some observers, including Hetal Mehta of St James's Place, believe the balance has now tipped in favor of hiking. The September hold was already a close call, and with inflation running hotter, Thursday's move looks all but certain.
What happens after this hike?
The bigger question is what comes next. Markets are pricing in at least three more quarter-point increases next year, which would take Bank Rate to around 4.75% or higher. But not everyone agrees.
PIMCO, a large bond manager, argues the Bank may deliver just one more hike in February and then hold rates steady for a long stretch. That view reflects the possibility that energy-driven inflation fades as the conflict-related price spikes drop out of the annual comparison, and that the economy slows enough to keep the Bank on the sidelines.
The gap between these two scenarios matters for borrowers and savers. If the market expects several more hikes, fixed-rate mortgage deals will be priced accordingly. If the Bank stops after one more move, those deals could become cheaper.
What it means for your money
For anyone on a tracker or variable mortgage, the immediate impact is clear: a rise in Bank Rate typically flows through to those rates within days, meaning higher monthly payments. A move from 3.75% to 4% adds roughly £15 per month per £100,000 of outstanding mortgage, though the exact figure depends on the lender and the loan terms.
Fixed-rate deals are a different story. They are priced based on what lenders expect the Bank to do over the next one to two years, not just the immediate decision. That's why the debate between "several more hikes" and "one-more-then-hold" can show up in the price and availability of new fixed-rate offers even before your renewal date.
For savers, a higher Bank Rate often means better returns on easy-access accounts and fixed-rate bonds, though banks are often slow to pass on increases. If you're shopping for a savings account, it's worth comparing rates in the weeks after the decision.
The Bank's decision also has broader market implications. UK government bond yields, which move with interest rate expectations, could react sharply depending on the vote and the accompanying statement. A 7-2 vote in favor of a hike would signal a hawkish tilt, potentially pushing yields higher. A more dovish statement, hinting at a pause, could ease pressure on fixed-rate mortgage pricing.
Investors in UK stocks, particularly banks and housebuilders, will also be watching. Banks tend to benefit from higher interest rates, as they can earn more on lending. Housebuilders and consumer-facing companies, on the other hand, could suffer if higher rates dampen demand for mortgages and spending.
The Bank of England's decision is part of a broader global trend. Central banks in Europe and elsewhere are grappling with similar energy-driven inflation pressures. The European Central Bank, for instance, is facing its own inflation challenge, as eurozone inflation hits 4%, complicating its December decision. Meanwhile, the FTSE 100 has risen as banks lead ahead of the expected BoE hike.
For everyday investors, the key takeaway is that interest rates are likely to stay higher for longer than many hoped. That means borrowing costs will remain elevated, but savers can find better returns. The path beyond Thursday's hike is uncertain, and the Bank's guidance will be just as important as the decision itself.
