Bank of England raises rates to 4% for first time since 2023

The Bank of England raised its main interest rate to 4% from 3.75%, its first increase since August 2023, and signalled that the sharp fall in energy prices after the U.S. midterm elections could limit the prospect of further hikes if sustained.

Governor Andrew Bailey told a news conference that "we've seen encouraging news in the past 48 hours" and added that "the best thing that can happen is to resolve the conflict in the Middle East." He said Thursday's increase "shouldn't be seen as the first in an inevitable long sequence of hikes," but stressed that "the outlook depends on what happens in the war with Iran."

The decision was unanimous after inflation accelerated this year, with one of the nine members of the Monetary Policy Committee backing a larger increase to 4.25%. Inflation hit 3.5% in September, an 11-month high and well above the bank's 2% target, cementing market expectations of a hike this month.

The bank mainly attributes the inflation spike to higher fuel costs caused by the Iran war and bottlenecks in the Strait of Hormuz that squeezed global oil and gas supplies. If energy prices keep falling, the expected peak in inflation of 5% next summer could be lower, reducing the need for future hikes. Brent crude fell about $15 a barrel this week to $96, but remains more than $30 higher than a year ago.

What do these terms mean?

Interest rate: The rate a central bank charges banks for borrowing, which feeds through to borrowing costs for households and companies.

Monetary Policy Committee: The panel inside the Bank of England that votes on interest-rate decisions.

Inflation: The sustained rise in prices of goods and services, measured by the bank through the consumer prices index.

Brent crude: One of the main global benchmarks for pricing oil, used to price most oil exports.