The Bank of England raised Bank Rate to 4% from 3.75% on Thursday by 8-1, with one member wanting 4.25%, as energy bills push inflation towards 5%.
The Monetary Policy Committee (MPC) said consumer price inflation (CPI) rose to 3.5% in September from 2.6% in June, and is now expected to reach around 5% by the middle of next year. One member voted for a 0.5 percentage point increase rather than 0.25.
The Ofgem household energy price cap rose to £1,723 in 2026 Q4 and is expected to increase to around £2,150 in 2027 Q1.
Governor Andrew Bailey said in his opening remarks that the January rise in utility bills alone adds around 0.4 percentage points to headline inflation.
Bailey said the Middle East conflict is in its ninth month and has pushed inflation higher in every G7 economy since February. He also made clear the limits of the Bank’s role.
“Monetary policy cannot influence global energy prices,” Bailey said, adding that the Bank is setting rates to stop higher energy costs feeding more broadly into consumer prices.
Scenarios put the inflation peak between 4.8% and 6.2%
The Bank’s central projection has inflation peaking at 4.9% in 2027 Q2. In its adverse inflation scenario, where energy prices stay high, inflation peaks at 6.2% and stays above the 2% target throughout the forecast period.
In the weaker demand scenario inflation peaks at 4.8%, then falls below target during 2028 and reaches 1.2% in 2029.
The central projection is conditioned on energy prices over the 15 UK working days to 27 October, when oil averaged $108 a barrel and gas 216 pence per therm, 38% and 81% higher than at the time of the July report.
Bailey said that on the morning of the speech Brent crude and UK gas were down around 15% since the start of the week, at $95 a barrel and 218 pence per therm.
He called that positive news, but the Ofgem observation window for the 2027 Q1 cap closes in less than a week.
Wages at 3% and food inflation at 1.3% show little pass-through
The Bank said there is little evidence so far of second-round effects, meaning higher inflation feeding into wage and price setting.
It added that the risk of larger effects has increased, partly because of the recent energy price rise and partly because slack in the labour market has stabilised.
Indirect effects of energy costs have been smaller than projected in July. Food price inflation was 1.3% in September, against the 2.7% the Bank forecast in July, and services price inflation was 3.7%, flat since the summer.
Private sector regular average weekly earnings grew 3% in the year to August, and the Bank projects that pace to hold for the rest of 2026.
Surveys and other indicators point to wage growth nearer 4%, and Bank staff judge underlying pay growth to be a little above the rate consistent with the target.
The MPC said policy is not on a pre-set path and it will adjust Bank Rate as necessary to return inflation to 2% in the medium term.
The median respondent to the Bank’s November Market Participants Survey expected Bank Rate to reach 4% in November and 4.25% in February.
The decision follows a closer call in July. At its meeting ending on 29 July, the MPC voted 6-3 to hold Bank Rate at 3.75%, with three members preferring 4%.
The European Central Bank announced a rise of 25 basis points (hundredths of a percentage point) in its deposit facility rate in September, according to the Bank’s report.
Higher borrowing costs are already weighing on housing. Mortgage approvals for house purchase fell 8% in the three months to September and reached their lowest monthly level since 2023, while the ONS house price index fell 0.8% in the three months to August.
