Bank of England raises rates as Middle East energy shock lifts inflation

Financial markets had widely expected the increase and are pricing in three more by the end of next year, but several commentators questioned whether that outlook is too hawkish given the risk of slower growth. Susannah Streeter, chief investment strategist at Wealth Club, said the decision was unlikely to unsettle markets but would add pressure on borrowers. She said policymakers were trying to restrain demand and prevent higher energy costs from feeding into wages and prices.

David Rees, chief economist at Schroders, said inflation could peak at about 4.5% next summer, later and higher than previously expected. The key risk, he said, is whether imported inflation spreads to domestic wages and services prices. Daniel Siluk of Janus Henderson Investors called the increase insurance against that possibility, but said evidence that the shock was becoming embedded remained limited. Higher energy bills, mortgage rates and tighter financial conditions are also weighing on household spending power.

Other analysts saw the outlook as uncertain. Isabel Albarran of TrinityBridge said resilient growth, consumer spending and employment had given the Bank both grounds and room to raise rates. If energy prices fall before February, she said, the latest move could be “one and done”; sustained high oil prices amid the conflict with Iran into 2027 would strengthen the case for another increase.

Daniele Antonucci of Quintet Private Bank described the decision as a risk-management move rather than the start of aggressive tightening. Felix Feather of Aberdeen said markets may be overstating the case for three further increases, but expected at least one, probably in February next year. Jon Cunliffe of JM Finn said higher yields continued to make gilts attractive, particularly in the seven-to-eight-year maturity area, and supported gradually extending duration.