Bank of England Raises Rate to 4%, First Hike in Over Three Years

The Bank of England raised its main interest rate to 4% from 3.75%, a rise of 0.25 percentage points and the first increase in more than three years, according to the BBC. The move will push up monthly payments for some mortgage holders while offering better returns to savers who shop around.

The decision has split opinion. The Bank argues that an energy price shock will feed through the economy and revive inflation. Critics, including the government's independent forecaster and a business group, say there is little sign of the wage pressure the Bank fears, according to The Guardian.

The Bank's case: a second burst of inflation

The Guardian reported that the Bank's policymakers believe the energy price shock, which followed the outbreak of war in Iran, is larger than first estimated. They expect it to spread through the economy, lift prices and prompt a wave of wage demands. In their view, that would give inflation a second burst next year and the year after.

The Bank expects economic growth of 1.6% next year and inflation rising to 4.9%, The Guardian said. Inflation stood at 3.5% in September, according to official figures.

The Bank also judged that households and firms are paying close attention to rising prices. It saw a risk that wage settlements would come in higher than businesses expect. This is despite its own business survey and a report from its regional agents showing that wage and price expectations have moved little since September.

The critics' case: a weak economy, little wage pressure

The Office for Budget Responsibility, which forecasts for the Treasury, told parliament this week that there was little impetus for strong wage growth, The Guardian reported. It expects the economy to grow by just 1% in 2027 and consumer price inflation to peak at 3.75%.

David Miles, the OBR's chief economist, said UK businesses are in a fairly weak state. He said they have absorbed much of the rise in energy and fuel costs, and profit margins have dropped from an average of 13% to 14% to between 10% and 11%. He said firms would have little appetite for big pay deals and would focus on rebuilding margins.

David Bharier, deputy director of the British Chambers of Commerce, said he was dismayed. He said there was little sign of a wage-price spiral, that unemployment is higher than in 2022 and that AI adoption is accelerating. In his words, "it is economic growth that will pay the premium."

The Guardian's analysis also noted that savings are low, vacancies are low, and retailers, hospitality firms and transport companies are struggling. That is a different backdrop from the 2022 crisis, when households held lockdown savings and firms competed hard for workers.

What this means for mortgages, savings and jobs

The BBC set out how the rise reaches households.

• Tracker mortgages: About 500,000 homeowners have a mortgage that follows the Bank's rate. For a typical loan, repayments rise by about £31 a month, though the amount depends on the size of the loan.
• Standard variable rates: Another 500,000 homeowners must wait to see whether their lender passes on the rise. For a 0.25-point increase, that would typically mean £14 more a month.
• Fixed-rate deals: The 87% of mortgage holders on fixed deals see no change until their deal ends, usually after two or five years. Lenders had already built the rise into new quotes, and the BBC said average fixed rates are much higher than predicted at the start of the year.
• Savings: Higher rates can lift returns. Moneyfacts' Rachel Springall said savers who left £20,000 in closed accounts lost out on an extra £139 over three years compared with easy-access accounts on sale. She said fixed-term deals are usually more lucrative.
• Renters: The BBC said renting while saving could get more expensive, because a higher Bank rate may raise costs for landlords.
• Jobs and pay: Firms say higher rates limit their ability to hire and raise wages, the BBC reported. Mitchell Barnes, chief executive of the manufacturer Ryse 3D, predicted reduced employment and more automation.

What's at stake

The Guardian's analysis warned of a scenario in which government and central bank, each pursuing its own mandate, end up holding back growth. It said ministers say they are constrained by bond markets and fiscal rules on borrowing. The Bank, meanwhile, is acting against inflation pressures it expects but that policymakers cannot yet see.

Whether wages and prices rise as the Bank expects, or stay subdued as the OBR forecasts, will determine whether the increase proves necessary.

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Around Prague, based on reporting by BBC News, The Guardian