Bank of England raises interest rates and warns of more pain to come
The Bank of England has raised interest rates for the first time in three years and warned households to brace for further pain.
Policymakers voted to raise rates from 3.75pc to 4pc on Thursday, the first increase since August 2023.
Britain’s borrowing costs rose and the pound edged up as the Bank signalled there could be another increase before Christmas.
The Bank blamed the ongoing conflict in the Middle East for triggering another sharp jump in energy prices, with John Healey’s maiden Budget doing little to ease a two-year decline in household incomes.
Threadneedle Street now believes inflation will peak at around 5pc by the middle of 2027, even if the economy slows sharply.
However, policymakers said price rises would peak at 6pc next summer if the Iran war did not end.
The Bank also laid bare the impact of the conflict on family finances, with Donald Trump’s war pushing up mortgage costs for the average household by £1,500.
Ofgem’s energy price cap is now expected to rise by more than £400 to £2,150 in January, with the Chancellor’s £100 Budget handout doing little to mitigate the increase.
Andrew Bailey, the Bank’s Governor, said growing price pressures from a prolonged war in the Middle East meant households still faced months of pain.
The Democratic landslide in the midterm elections caused a sharp drop in oil prices on Wednesday, sending prices back below $100 per barrel.
JD Vance, the US vice-president, blamed the war for the Republicans’ losses and indicated that he would work harder to achieve a lasting end to the conflict.
However, Mr Bailey said the way gas and electricity prices are fixed quarterly in the UK meant households would still bear the brunt of price rises in the short term.
He said: “However much energy prices come down tomorrow, a lot of that process is actually in the works.”
While Mr Bailey said that a sustained fall in energy prices meant inflation would peak closer to 4pc, he added: “I’m afraid quite a bit of what we’re pointing to will happen, and of course that will affect families.”
Other members of the Monetary Policy Committee raised the prospect of another increase before Christmas, which Mr Bailey declined to rule out.
Investors are pricing in a 50pc chance of a rate rise at its next meeting on Dec 17.
Andrew Goodwin, at Oxford Economics, said a December rate increase was firmly “on the table”.
“The degree of inflationary pressure already in the system means another hike in December or February is likely.”
The decision also revealed a split in the committee, with one member, Catherine Mann, calling for an immediate 0.5 percentage point increase to 4.25pc.
However, the Governor stressed that Thursday’s increase did not mark the beginning of an “inevitable long sequences of hikes”.
In its latest evaluation of the economy, the Bank said there had been “limited evidence so far of knock-on effects from higher energy prices”.
However, it added that pay demands remained “elevated”, with average pay rises of 3.5pc expected next year, while the economy was more resilient than previously thought.
It said: “The UK economy is facing a continued energy price shock, which has worsened since July as prices of oil, gas and many related products have risen materially.”
The Bank said families were raiding their savings to maintain their living standards as it predicted that household incomes would fall in the next two years after taking into account inflation and Labour’s tax raids.
It added that the Chancellor’s near-100 measures in his maiden Budget would do little to boost growth, with Mr Healey’s decision to freeze fuel duty only providing relief.
Thursday’s increase means that typical mortgage costs for around a million families on variable-rate deals will rise by between £15 and £30, according to UK Finance.
Its analysis shows that roughly 2.3 million people on fixed-rate mortgage deals will see them expire next year.