Markets
The Bank of England Raised Rates to 4% by 8 Votes to 1
The Bank of England raised Bank Rate by a quarter point to 4% on Thursday, its first hike in more than three years, with one member voting for a half-point rise.
The Bank of England did what the market expected, and one member wanted more. Its Monetary Policy Committee raised Bank Rate by 0.25 percentage points to 4% from 3.75%, by eight votes to one, in a decision published at noon London time on Thursday, November 5. It was the Bank's first increase since August 2023. The dissenter, Catherine Mann, voted for a half-point rise to 4.25%, arguing that an activist approach was needed to stop inflation becoming embedded.
The reason is energy. In the 15 working days to October 27, Brent crude averaged $108 a barrel and UK gas futures 216 pence a therm, 38% and 81% higher than when the Bank last published forecasts in July, as the Iran war disrupted Gulf supplies. Consumer price inflation reached 3.5% in September, about one point of it from direct energy effects, and the Bank's staff now expect it to rise to about 4.5% in the first quarter of 2027 and about 5% in the second, roughly 1.25 points higher than projected in July. Governor Andrew Bailey said there was enough inflationary pressure in the pipeline from energy prices to warrant the move, Reuters reported, and that the conflict had lasted longer than expected.
What the Bank did not say mattered as much. "Monetary policy is not on a pre-set path," the committee wrote, and external member Alan Taylor described the decision as an insurance hike: "this is not the start of a hiking cycle". The minutes noted limited evidence so far of second-round effects in wages and prices, lower-than-expected food inflation and falling mortgage approvals, while two-year fixed mortgage rates had already risen by nearly 50 basis points since early September. Budget measures are expected to take about a quarter point off inflation by mid-2027.
The market reaction was muted because the decision had been almost fully priced: overnight swaps implied a probability of about 96% the day before. Sterling traded near $1.348 in the morning and the FTSE 100 ended 0.43% lower at 10,782.66, a modest loss on a day when the Nasdaq fell 5.5%. The Bank's own survey of market participants pointed to a further rise to 4.25% in February, a path still below the one priced into short-term sterling rates.
The vote also leaves London out of step with the Federal Reserve's calendar. Traders cut the odds of a Fed hike in December to about 70% after Thursday's sell-off, while the Bank of England's next decision is on December 17. A peace deal that brought Brent back towards $80 would weaken the case for a second move; the oil price that the committee used in its forecasts was already about $13 above Wednesday's close, which is the cushion that Taylor's "insurance" language leaves room for.