The Bank of England has increased the interest rate by 0.25% to 4%, the first hike since August 2023.
Members of the Monetary Policy Committee (MPC) voted by a majority of 8-1 in favour of increasing the base rate by 0.25% in line with most economists’ expectations.
One member voted to increase bank rate by 0.5% to 4.25%.
Prior to today, the bank has held the rate at 3.75% for six consecutive meetings.
At the MPC’s September meeting, three of its nine members voted to raise rates to 4%, while six backed keeping them at 3.75%.
Energy costs continue to push inflation well above the Bank of England’s 2% target. The latest figures from the Office for National Statistics (ONS) showed inflation increased to 3.5% in the 12 months to September.
In the MPC meeting minutes, it stated: “The duration and scale of the energy price increase had generated sufficient inflationary pressures in the pipeline to warrant an increase in Bank Rate.”
“There was a range of views among these members about the extent to which the underlying disinflationary process prior to the conflict had continued, the degree of spare capacity in the economy, and the restrictiveness of the current monetary policy stance.”
“These members agreed that, although evidence of second-round effects had been limited, the availability of evidence would increase over time, and would continue to need close monitoring, along with the implications of developments in energy prices for medium-term inflationary risks.”
The next MPC meeting is on 17 December.
Commenting on the increase, John Charcol mortgage technical manager Nick Mendes says: “The Bank’s decision to raise Bank Rate by 0.25 percentage points to 4% was a precautionary move rather than a sign the economy was overheating.”
“With inflation rising and expected to climb further early next year, the MPC chose to act before higher energy costs could feed into wages and wider prices.”
Mendes adds: “What matters most now is how markets read the Bank’s message. If the rise is seen as a one-off precaution, swap rates could ease and lenders would have room to keep cutting fixed rates. If it is seen as the start of a series of increases, the recent improvement in mortgage pricing could stall.”
Also commenting, Santander UK chief economist Frances Haque states: “For homeowners, the immediate impact of today’s increase will be felt most by those on tracker and variable-rate mortgages, with those coming off fixed-rate deals facing continued uncertainty over the coming months.”
“We may see higher borrowing costs impacting affordability and with that, some slowdown in market activity, with last week’s Bank of England data already showing mortgage approvals easing in September. That said, buyers who are in a position to proceed may have more room to negotiate.”
“The key question is whether today’s decision is a precautionary move or the start of further increases from the MPC. With energy prices facing further increases, inflation expectations rising and wage growth stagnating at levels above those consistent with the 2% target, it certainly looks as if further hikes will feature in 2027.”
“However, the question about how the economy reacts to all of this will be critical; the resilience it has shown so far has been remarkable, but the tension is mounting. For the time being, homeowners should prepare for borrowing costs to remain elevated.”
