A quarter-point move, and one dissent
The Bank of England lifted its benchmark interest rate by 25 basis points to 4% on Thursday, its first increase since August 2023 and the first in more than three years. The Monetary Policy Committee backed the move by eight votes to one; the lone dissenter wanted a half-point rise to 4.25%. The decision had been widely expected, with markets assigning better than a 99% probability to a hike beforehand, according to LSEG data.[S1][S2][S3][S4][S5][S6][S7][S8]
The Bank becomes the last major central bank to begin tightening since the United States and Israel went to war with Iran eight months ago. Traders were also assigning roughly a one-in-four chance to another increase in December, a sign that investors see the cycle as possibly unfinished rather than a single correction.[S1]
Energy shock pushes the inflation forecast up
Policymakers said the Middle East conflict is now in its ninth month and that worldwide energy costs have kept climbing from a level that was already high. They now expect British inflation to reach roughly 5% around the middle of 2027, then decline as the energy-driven effect on annual price growth wears off and restrictive policy continues to weigh on demand.[S1]
Official figures released earlier this month showed annual inflation at 3.5% in September, pushed up by motor fuel costs. Because Britain imports more energy than it exports, it is especially exposed to outside supply shocks of the kind produced by the Iran war this year.[S1]
Bailey's caution and Mann's larger ask
Governor Andrew Bailey said in the November Monetary Policy Report that absent real movement toward ending the Middle East conflict, the risks to energy prices and therefore to inflation point upward. He added that without developments that reduce those inflationary dangers, he could see grounds for another rate increase followed by a more conditional stance tied to evidence on energy and price dynamics.[S1]
Catherine L Mann, the committee's most hawkish member, explained that she sought a bigger increase because research indicated non-linear inflation risks. She described her earlier quarter-point votes as a down payment against second-round effects, and argued that the economy has crossed a statistical threshold into a high-inflation, tight-labour-market regime in which households and firms respond asymmetrically. She also cited a separate research approach suggesting the economy may have breached a policy credibility threshold, and concluded that a 50-basis-point rise would be the better policy from a risk-management and credibility standpoint.[S1]
Markets: gilts up, sterling steady
Gilt yields, the borrowing costs on UK government debt, were already trending upward ahead of the announcement and kept edging up in its wake. The 10-year benchmark stood 2 basis points higher at 5.1546%, and the 2-year rate rose 4 basis points to 4.782%. Meanwhile sterling, which had hit its highest level since Brexit on Wednesday, showed no change versus the dollar or the euro by Thursday afternoon.[S1]
Scott Gardner, an investment strategist at JPMorgan Personal Investing, called the November move hugely symbolic in a note on Thursday. He said it reverses the direction expected at the start of the year, when many assumed rates would fall because UK inflation had largely been brought under control. He added that the outlook depends on oil and on natural gas prices, which have climbed sharply in recent months, and that tentative signs of second-round effects are appearing as goods and services inflation accelerates; the Bank, he said, must weigh that against the risk that overly aggressive hikes could hamper recent positive growth.[S1]
