Flash commentary: Bank of England lifts UK rates

The Bank of England hiked rates by 25bp at their November meeting, raising the Bank Rate to 4%. The move was widely expected, given rising energy prices and higher headline inflation, and marks the first hike in more than three years. The Monetary Policy Committee voted unanimously in favor of raising rates, however, in a hawkish surprise, Catherine Mann, an external member of the MPC, voted for a 50bp hike.

The BoE’s central forecast is for CPI to hit 4.9% in Q2 2027, as higher energy prices have knock-on effects, before it is seen dropping to 2% by Q3-2028. They noted that while the direct effects of higher energy prices are clear and will continue to feed into firm and household energy bills, there remains limited evidence of additional knock-on effects on other prices and wages. Nevertheless, the risk of second-round effects emerging has risen since September, and without a resolution to the war in Iran, the more likely it is that inflationary pressures will build up in the pipeline.

In that context, the rate increase could be viewed as a preemptive response to the ongoing inflation shock.

The economy has also proven more resilient despite rising prices and the Bank raised their 2026 GDP growth forecast to 1.6% (from 1.1%), and 2027 up to 1.3%, while 2028 was lowered to 1.2% (from 1.7%) reflecting the expected impact of higher borrowing costs.

They commented that there are initial signs that growth in some sectors of the UK economy is being driven by AI related investment, while there is also tentative evidence that the softening in the labor market has stabilized. The Bank commented that businesses are reporting a tough demand environment with limited ability to pass on costs, and that consumer confidence has recently weakened.

BOE Governor Andrew Bailey said that absent a material improvement in the energy backdrop, he can see the argument for a further increase, while BOE Chief Economist Huw Pill said it is unlikely to be the last hike unless the Iran War is resolved. The Bank will assess evidence at each meeting, and will monitor underlying pay, pricing behavior and the amount of slack in the economy, responding as necessary to bring inflation sustainably back to their 2% target.

After the meeting, the SONIA (Sterling Overnight Index Average) forward rate was pricing in around a 55% chance that they hike again by 25bp at the next meeting in December, while into 2027, around 57bp worth of hikes are priced in, which would leave the overnight SONIA rate at around 4.70%, if realized.