Bank of England Delivers First Rate Hike in Over Three Years and Lifts Bank Rate to 4%

The Bank of England has stopped waiting. On Thursday it raised Bank Rate by a quarter point to 4%, its first increase since August 2023, as the war with Iran and spiralling energy costs dragged inflation fears back into British policy.

Rates had sat at 3.75% for almost a year, since the last cut just before Christmas 2025. That move was supposed to be part of a long walk down from the 5.25% peak. Instead, the Bank has turned around and delivered its first hike in more than three years.

Nobody voted to hold

The Monetary Policy Committee split 8-1, and the lone dissenter wanted more, not less. External member Catherine Mann pushed for a half-point jump to 4.25%. Not a single member voted to keep rates on hold.

That was more hawkish than the City expected. Goldman Sachs and JPMorgan had forecast a 7-2 vote and Deutsche Bank 6-3, with some members staying put. The driver was energy: higher prices lifted the Bank's inflation forecast for early 2027, with coverage putting it near 5%.

Alan Taylor, one of the committee's doves, framed his vote as risk management, a one-for-now insurance hike.

Bailey keeps December open

Governor Andrew Bailey insisted the Bank is not on a pre-set path. He said he could see the argument for a further increase followed by a more conditional approach, and that Thursday's move should not be read as the first in an inevitable long sequence. But he added that unless the Middle East conflict is resolved, it does not seem to be the last increase either.

Markets heard that clearly. Traders now price roughly a 50% chance of another quarter point next month, and close to three more 25 basis point hikes by the end of 2027.

Two-year gilt yields rose 3 basis points to 4.77%. The pound, which had rallied to its strongest relative level in over a decade ahead of the decision, steadied around $1.3472.

A rough day in London

Stocks did not enjoy it. The FTSE 100 gave back early gains and closed down 46.55 points, or 0.4%, at 10,782.66, while the FTSE 250 fell 0.9%. London had to absorb a hawkish central bank just as the AI trade was starting to buckle on US screens, a selloff that by Friday had sent Asia's chip stocks crashing after Wall Street lost about $3 trillion.

The reversal has a familiar shape. The Bank spent 2022 chasing inflation above 11% after Russia's invasion of Ukraine sent energy prices soaring, then spent the years since slowly unwinding it. Another energy shock has now put it back on the same road, with December's meeting already in play.

Some offers on this page may be paid placements or contain affiliate links.