Bank of England raises rates for first time since 2023, warns more likely

The Bank of England raised interest rates on Thursday for the first time in more than three years. According to Reuters, the Monetary Policy Committee voted 8-1 to lift Bank Rate to 4% from 3.75%. It was the first increase since August 2023. The central bank also warned that at least one more rise was likely if the US-Iran conflict continues. Reuters noted that the Bank had started on a path already begun by its main peers.

The committee agreed on the need to raise rates but split over the size of the move. Pound Sterling Live reported that the sole dissenter, Catherine Mann, voted for a larger 50 basis point hike. In the minutes, Mann said she was concerned about non-linear inflation risks. UK consumer price inflation had risen to 3.5% in September, and she viewed that as a potential trigger for a loss of confidence in the central bank. Reuters also reported a further hike was likely to be needed even if oil prices stayed at current levels, because there was already a significant amount of inflationary pressure in the pipeline.

The decision was widely expected. Reuters said both investors and financial markets had been near-certain of a rise this month. Ahead of the meeting, markets had also priced in three quarter-point rate rises for 2027, which was more than most economists think is likely. Before the decision, ING had said market pricing for BoE hikes looked extreme, and that a follow-up hike in February was also likely.

The market reaction was muted. A Reuters report said sterling strengthened against the US dollar after the announcement. A later Reuters update put the pound little changed on the day at around $1.3468, against around $1.3453 earlier. Rate-sensitive two-year gilt yields rose about 3 basis points to around 4.77%. Reuters said yields fell elsewhere. Traders increased their bets on further tightening, pricing in about 76 basis points by the end of 2027, against roughly 67 basis points before the decision.

Pound Sterling Live said the pound gave back the gains it made on the hike. It said investors judged that the Bank's hawkish message was already in the price. It reported that markets priced a 50% chance of a second hike in December, up from around 30% before the decision. It also said the pound-to-euro rate had tested 1.20 repeatedly since late October without a daily close above that level.

Analysts quoted by Reuters stressed that the outlook for further hikes will matter more than the decision itself. One said sterling, which had rallied against the dollar and euro this week, could face pressure if expectations for further tightening ease. Another said the decision was fully expected, and that further hikes looked increasingly likely even if they were described as insurance hikes.

The move comes as central banks respond to elevated inflation driven by higher energy costs. The Bank cited the US-Iran conflict as a key risk. For currency markets, the Bank's signal puts attention on the path of oil prices and UK inflation data. Those factors will shape how much further tightening is priced in, and in turn how sterling trades against the dollar and euro. Nothing in the decision determines where the currency goes next. Market pricing has already shifted several times in the past week.

This article is a factual summary of reported events and is not investment advice.

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