Household bills to jump as Bank of England hikes rates to 4%

The cost of borrowing for UK households rose on Wednesday as the Bank of England increased its base rate to 4%. This marks the first increase in over three years. The decision was driven by rising inflation tied to the ongoing war in Iran. Eight members of the monetary policy committee voted for the 25 basis point hike, while one member wanted a larger move.

Oil prices have stayed above $100 per barrel in recent months. This trend emerged as hopes for a deal to reopen the Strait of Hormuz faded. The Bank has updated its inflation forecasts to reflect this reality. It now predicts UK inflation will reach 4.9% by mid-2027. This is a sharp jump from the 3.2% projected in July. Inflation had already hit 3.5% in September.

Governor Andrew Bailey said further rate increases are possible soon. He noted that the resolution of the Iran conflict is the key factor for future decisions. Minutes from the meeting showed that without news softening inflation risks, there is a strong argument for raising rates again. However, Bailey cautioned that this hike does not guarantee a long series of future increases.

Market dynamics have shifted recently. Oil prices dropped below $100 after Democratic victories in the US Congress. Some investors viewed these results as a limit on President Donald Trump's ability to prolong the conflict. Vice President JD Vance blamed the political rout on the war and its impact on inflation.

The committee explained that high oil prices are passing through to business and consumer costs. The Ofgem energy cap for Great Britain is expected to rise to 2,150 pounds in January. Another increase is planned for April. Food price inflation could reach 4.75% by mid-2027. Businesses have absorbed energy costs so far, but the Bank expects them to pass these costs on to consumers soon.

The rate hike came one week after Chancellor John Healey presented his first budget. The package included measures to cushion the impact of higher energy prices. These measures include extending the fuel duty freeze and cutting VAT on electricity bills. The MPC estimated these steps would reduce inflation by a quarter of a percentage point by mid-2027.

The Bank warned that real post-tax income is expected to fall this year and next. This decline aligns with forecasts from the Office for Budget Responsibility. The next interest rate decision is scheduled for 17 December.