Bank of England Lifts Rates to 4% Amid War-Driven Inflation

The Bank of England increased its benchmark lending rate by a quarter point to 4% on Thursday, marking the first adjustment in more than three years. The move addresses a surge in consumer prices driven by the ongoing conflict with Iran. The bank’s Monetary Policy Committee, comprising nine policymakers, voted to lift the rate from 3.75% to counter the recent inflationary pressure.

Consumer price inflation reached 3.5% in September, an 11-month peak that sits well above the bank’s 2% target. This spike was primarily fueled by rising energy costs. The war has created bottlenecks in the Strait of Hormuz, restricting global oil and gas supplies and driving up fuel prices for consumers and businesses alike.

Ellie Henderson, an economist at Investec, noted that committee members have grown impatient with the sustained rise in prices. She warned that the longer energy prices stay high, the greater the risk that a temporary shock becomes a permanent feature of the economy. The rate hike aims to cool borrowing and spending to keep inflation in check, though it may also slow economic growth.

The central bank released quarterly economic projections alongside the rate decision. These forecasts are unusually uncertain because they depend heavily on the trajectory of the Iran war. Recent heavy losses by the Republican Party in U.S. midterm elections have contributed to a sharp drop in energy prices. If these declines continue, the upcoming peak in inflation could be lower than expected, potentially tempering the need for further hikes by the Bank of England and other central banks.

The U.S. Federal Reserve and the European Central Bank have also raised rates recently in response to similar inflation trends. For the Bank of England, this decision follows a period where interest rates were trending down from a 15-year high of 5.25%. That downward trend began to reverse after the U.S. and Israel launched attacks on Iran on February 28, which disrupted energy markets and accelerated price increases.