The Bank of England has raised its key interest rate to 4%, marking its first increase since August 2023, and the central question now is whether further rises will follow. According to BBC News, the rate-setting committee remains divided on the path ahead, with some members signalling multiple increases while others expect just one more.
The voting split reveals genuine uncertainty about the trajectory. Three of the nine committee members referred to "rises" in plural form, while one voted for a double increase to 4.25%. Three others, including Governor Andrew Bailey, indicated support for just a single additional rise. According to AP News, eight members backed the quarter-point rise on 5 November and one preferred a half-point increase, underscoring the divisions within the committee.
The prevailing expectation appears to be for one more increase in February 2027, following a "two and done" pattern. However, this projection carries a significant caveat: it depends entirely on whether the Middle East conflict persists and continues to drive inflation pressures.
Why has the Bank acted now?
The Bank's primary concern is that elevated and rising inflation could trigger a self-reinforcing cycle of price expectations. September inflation reached 3.5%, an 11-month high, sitting well above the Bank's 2% target. The Bank's forecasts indicate inflation will climb to just under 5% in the spring of 2027, driven partly by a projected 27% surge in typical household energy bills to £2,150 annually in January.
The Iran war, which began after United States and Israeli attacks on 28 February, has constrained global oil and gas supplies around the Strait of Hormuz. At the time of the Bank's November forecast, oil prices used in the projection averaged $108 a barrel. Yet on the very day the rate rise was announced, oil prices had fallen 13% below that level, reflecting market expectations that geopolitical tensions might ease following recent political developments.
What does the economic backdrop reveal?
An unusual feature of this rate decision is that the broader UK economy is performing considerably better than the Bank had anticipated. Growth reached 0.6% and 0.5% in the first two quarters of the year, with the Bank projecting 0.7% expansion between July and September before a slowdown in the final quarter. Unemployment has stabilised and even fallen slightly, defying earlier pessimistic forecasts.
This stronger-than-expected performance has supported sterling, which has reached its highest level since the Brexit referendum when measured against a basket of currencies. A stronger pound helps contain inflation by making imports cheaper, providing some natural offset to price pressures.
What do the Bank's latest projections show?
The Bank's November outlook puts inflation at around 5% in the second quarter of 2027, with a return to its 2% target projected in the third quarter of 2028. This extended timeline reflects the persistent impact of energy costs and geopolitical disruption on the inflation outlook. Market participants surveyed by the Bank expect Bank Rate to reach 4% in November and 4.25% in February, aligning with the committee's apparent consensus for one further increase.
How conditional is the February rise?
Governor Andrew Bailey has stated that further increases are possible if the Middle East conflict continues, but he emphasised that the November rise does not mark the beginning of an inevitable sequence of hikes. The entire trajectory of future rate decisions hinges on whether the war persists and whether it continues to disrupt energy supplies and drive inflation.
Predicting where interest rates will ultimately settle resembles throwing darts at a board that constantly shifts position, with expectations about the duration and economic impact of the conflict changing from day to day. The Bank has thrown a tentative first dart, and a second is probably coming in February 2027, but the trajectory beyond that remains genuinely uncertain.
What happens next?
The next scheduled Monetary Policy Committee decision is set for 5 February 2027, when the committee will release its decision alongside the February minutes and Monetary Policy Report. By that date, market participants and households will have had three months to observe whether geopolitical tensions ease or intensify, and whether inflation begins to respond to the November rate increase.
