Bank of England set to raise key rate to 4% as inflation rises

Inflation and growth forecasts will accompany Thursday’s rate decision

The Bank of England is expected to raise interest rates on Thursday, its first increase in more than three years, in a move aimed at tackling the inflation shock caused by the Iran war. Economists say the nine policymakers on the Monetary Policy Committee have little option but to lift the bank’s key rate, taking it to 4% from 3.75%.

U.K. inflation hit an 11-month high of 3.5% in September, above the bank’s 2% target, and it is predicted to rise further over the coming months. The September figure cemented market expectations of an increase this month, with potentially more to follow in 2027. The rate-setters have faced steadily building pressure in recent months.

This year’s inflation spike has been driven above all by fuel costs, which rose sharply as a result of the Iran war. Ensuing bottlenecks in the Strait of Hormuz have squeezed global supplies of oil and gas.

Ellie Henderson, an economist at Investec, said: “We imagine that many committee members’ patience with the recent rise in inflation has worn thin. The longer energy prices remain elevated, the greater the risk that a temporary price shock becomes more permanent.”

An increase on Thursday would be the first since August 2023. It would also mark a turn for U.K. rates, which had been trending downward from a 15-year high of 5.25% until the United States and Israel attacked Iran in late February.

Quarterly economic projections — notably for inflation and growth — are due to be published alongside the decision. By making borrowing more expensive, higher interest rates cool an economy, bearing down on spending and inflation; they restrain growth as well.

The Bank of England would not be alone in tightening. The U.S. Federal Reserve and the European Central Bank are among the central banks that have raised rates recently in response to rising prices.