Bank of England raises rates to 4%, its first increase since 2023, and signals at least one more

The Bank of England raised its main interest rate from 3.75% to 4% on Thursday, the first increase since August 2023⁶. It was also the first rise since the start of the Iran war, a conflict that has lifted energy prices^4,8.

The vote was 8-1, with Catherine Mann voting for a larger 0.5 percentage point increase³. Every member therefore backed higher rates, and policymakers supported the first increase in more than three years². Most analysts had expected the move from 3.75% to 4%⁹.

The Bank signalled that it is planning at least one further increase¹. It warned that at least one more rise was likely⁵, and indicated it was poised to raise rates again in the coming months².

Why it matters to investors

The decision pushed gilt yields higher⁵ and boosted the pound and UK bond yields⁴. Earlier on Thursday, the pound had reached its highest level against a basket of currencies since the Brexit referendum a decade ago¹⁰.

The Bank paired the move with hawkish inflation forecasts³, warning that inflation could reach 4.9%². Under its adverse inflation scenario, inflation peaks at 6.2% and stays above the 2% target throughout the forecast period¹¹. The Bank warned that Thursday’s rise is unlikely to be the last unless the Iran war ends¹¹.

With the move, the Bank of England joined a swath of global policymakers, including the Federal Reserve, the European Central Bank and the Bank of Japan, that have raised rates¹². Until now it had stayed on the sidelines while those central banks tightened^4,12.

The Bank’s guidance that more may come⁷ means the quarter-point rise is unlikely to be a one-off, by its own account¹¹.

What to watch

The path of energy prices is central to the outlook. Those prices have fallen since the US midterm elections raised hopes for an end to the war⁸, and the Bank has tied the chance of further increases to the course of the conflict¹¹.

The split over the size of the move is another signal. Mann’s vote for a half-point rise³ shows that at least one policymaker wanted faster tightening, while the forecast of inflation at 4.9%² sets the bar the committee will measure itself against.

Markets will also test whether sterling’s strength holds after its run to a decade high¹⁰, and whether gilt yields keep rising as investors price the further increases the Bank has signalled^1,5.