Bank of England Poised for First Rate Hike in Three Years as Iran War Fuels Inflation

The Bank of England is tipped to raise interest rates on Thursday for the first time in more than three years, with economists expecting the nine rate-setters on the Monetary Policy Committee to push the key rate up by a quarter point, bringing it to 4%. That would be the first increase since August 2023.

The trigger is inflation. UK price growth hit an 11-month high of 3.5% in September, a full point and a half above the bank's 2% target. Fuel costs have been the main driver, climbing sharply since the Iran war and the bottlenecks it triggered in the Strait of Hormuz squeezed global oil and gas supplies. Economists expect this month's move — and potentially more in 2027.

Investec economist Ellie Henderson reckons the committee's tolerance has run out. “We imagine that many committee members' patience with the recent rise in inflation has worn thin,” she said, warning that “the longer energy prices remain elevated, the greater the risk that a temporary price shock becomes more permanent.”

The rate decision lands alongside the bank's quarterly economic projections, with the inflation and growth forecasts getting close scrutiny. Higher interest rates cool an economy by making borrowing more expensive, which drags on spending and prices alike — but on growth too.

Rate-setters had been drifting downward from a 15-year peak of 5.25% until the U.S. and Israel attacked Iran in late February, which reset the picture. The Bank of England isn't alone in reversing course: the U.S. Federal Reserve and the European Central Bank have both raised rates recently as prices climbed.