The Bank of England's Monetary Policy Committee has voted 8-1 to increase Bank Rate from 3.75% to 4%. One member voted to increase Bank Rate by 0.5 percentage points, to 4.25%.
The decision, which was widely expected, marks the first increase since 2023, with Bank Rate held at 3.75% throughout 2026.
Inflation rose to an above-expected 3.5% in September from 3.1% in August, marking a third consecutive monthly increase and the highest annual rate since last October.
CPI inflation is now expected to rise to around 5% by the middle of next year, before falling as the impact of rising energy prices on 12-month inflation rates fades and more restrictive monetary policy bears down on inflation.
The MPC's meeting minutes said: "While the direct effects of higher energy prices are clear, and will continue to feed into firm and household energy bills, there remains limited evidence of knock-on effects on other prices and wages. However, the degree of inflationary pressure in the pipeline is now sufficient to warrant an increase in Bank Rate. Activity data in recent months have generally been stronger than expected, adding to the case for modestly tighter monetary policy."
Amid higher inflation and energy prices, economists predict further increases to Bank Rate in 2027, although are split on how many further hikes are to come.
UK economist Alexander Harvey commented: “The communications on the path of future rates will be key. Markets currently price a total of 125bps in hikes by end-2027; however, the MPC has previously argued that a large chunk of this is a risk premium. We forecast one more 25bps hike after the November meeting, but the risks are tilted to tighter policy.”
Kevin Shaw, national sales managing director at LRG, said: "Today’s rise to 4% will come as little surprise. Lenders have largely priced it in already, so the direct effect on mortgage rates should be limited, even if some edge their rates up slightly. The bigger impact is on sentiment, because a rate rise makes the headlines. But it’s a moment in time, not a turning point. We may see one more rise in the early part of 2027, taking rates to 4.25%, but I’d be surprised if they went any higher.
“What the market has now is clarity. The Budget has come and gone without any real curveballs for buyers and sellers, and today’s decision is out of the way. This time last year, the housing market spent much of the final quarter treading water while it waited for the Budget. This year, people know where they stand, and we’re cautiously optimistic about the start of 2027, when we expect the usual seasonal upturn as more buyers return.
“Prices have been correcting for the past two or three years while average wages have risen, so affordability is gradually improving, even if it’s still stretched. Broadly speaking, we expect prices to be flat next year, although that will vary from one local market to the next. The Your First Home scheme should also bring some energy to the market. It’s aimed at new-build homes, but it gets first-time buyers thinking about buying, and once they’re on that journey, they’ll be looking at the wider market too."
Gerard Boon, managing director of Boon Brokers, commented: "In my opinion, this approach fails to address the main cause of the inflation we are experiencing. Much of the pressure is coming from the supply side, particularly the disruption to energy supplies caused by the conflict in Iran. Increasing borrowing costs will not resolve those shortages.
"My concern is that households will face a further reduction in their living standards as spending is deliberately squeezed. The UK urgently needs supply-side reform, with a greater focus on domestic energy production, to reduce our exposure to these shocks in the future."
Steve Cox, chief commercial officer at Fleet Mortgages, said: “The MPC has clearly decided it can no longer afford to wait, although whether today's increase to 4% ultimately proves to be the right decision remains open to question.
"There has been a growing sense that an increase was becoming inevitable, particularly as concerns about the inflation outlook have intensified, but the Committee is making this decision against a backdrop of considerable uncertainty about where the economy goes next. The conflict in the Middle East continues to have a significant influence on the outlook, and there is a danger attempting to get ahead of inflation now could create additional problems for an economy already struggling to generate meaningful growth.
"However, the unanimous vote for an increase suggests this represents a clear shift in thinking across the Committee, with all nine members convinced an increase was necessary, despite the continuing uncertainty over the economic outlook and the effectiveness of higher rates in tackling the UK’s current inflation level."
Mark Harris, chief executive of mortgage broker SPF Private Clients, added: “While we would have liked to have seen the Bank of England continue to be brave and hold base rate at 3.75% for another month, it was perhaps inevitable that it would bow to inflationary pressure and vote for an increase. There may well be another rate increase to come either at the next meeting in December or early next year so borrowers should review their situation and take action if needed.
“While inflation rose to 3.5% in the 12 months to September, there is still limited evidence of second-round inflationary effects which the Bank had been concerned about. Higher mortgage rates, regardless of the hold in base rate throughout the year, have acted as a tool to reduce borrowers’ spare cash and therefore spending, which would have risked pushing inflation higher.
“Current fixedbrate mortgage pricing is based on market expectations of four quarter-point increases in base rate. Should the financial markets start to see this as the near-term peak in rates, swap rates should drop and mortgage rates should follow, which will be welcome news for borrowers.
“Although average mortgage rates are reported to be at a three-year high, with Barclays, Halifax and Nationwide all repricing downwards this week there may be cheaper deals available."
