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Interest rate hike to 4% ‘gives borrowers a shiver’
Bank of England raises interest rate by a quarter to 4% after overwhelming majority call for a hike, first time rate has moved in 11 months.
In a eight to one majority, the Bank of England votes to increase interest rates by 0.25% to 4% due to inflation and the impact of the conflict in the Middle East.
The reason for the increase is down to external factors, the Bank’s monetary policy committee explained: ‘The conflict in the Middle East is now in its ninth month. Global energy prices have continued to rise from an already elevated level. CPI inflation increased to 3.5% in September. It is now expected to rise to around 5% by the middle of next year.’
The inflation outlook is stark with the Bank expecting CPI to rise to 4.5% in January, as the UK struggles to deal with price hikes caused by the Iran war.
This is likely to lead to more interest rate rises with the next meeting on 17 December. The interest rate last changed in December 2025, when the Bank cut rates from 4% to 3.75%.
Susannah Streeter, chief investment strategist, at Wealth Club, said: ‘Policymakers are trying to douse the flames of inflation by raising the base rate by 0.25 percentage points to 4%. A hike was widely expected, so it hasn’t set off fireworks on financial markets, but it will give borrowers a shiver as budgets become stretched in the year ahead.’
The eight members who voted for the 0.25% hike included Bank governor Andrew Bailey, Sarah Breeden, deputy governor, and Huw Pill, the chief economist.
Pill struck a hawkish tone, saying a 0.25% rise was ‘unlikely to be sufficient’ and warned further interest rate rises are ‘likely’ to be needed to ‘confront challenges and risks’.
But there was one vote for a bigger increase by former Citibank economist Catherine Mann, who wanted to see a 0.5% increase to 4.25%. Mann argued that a half-point would be ‘good policy’, stressing this three times, citing the risk of higher energy costs and inflation.
Coming a week after John Healey’s first Budget, MHA head economist Joe Ellis said: ‘The impact of today’s decision extends beyond Threadneedle Street. A rise in interest rates creates a headache for the chancellor.
‘His fiscal headroom has already fallen to £15bn, down from £24bn in March. Higher interest rates and rising gilt yields will push up the cost of servicing the national debt, which now exceeds £3tn, and will erode the fiscal headroom even further.’
Buy to let landlords have been hit again with the increase in interest rates, following on from last week’s extra 2% tax on rental income bringing the annual rate to 24% from next April announced at the Budget.
Heather Powell, a partner at Blick Rothenberg, said: ‘Buy to let landlords will be looking carefully at their finances, as they will now need to factor in higher mortgage costs in their investment appraisal following the increase in the Bank of England base rate to 4%.
‘This is on top of the additional 4% income tax on their rental profits they will need to pay from April 2027.
‘Buy to let is increasingly less attractive as an investment, and those who already own buy to let properties are selling up. The net result will be a reduction in rental properties and, in the long run, an increase in rents due to a shortage of supply.’
An increase in the bank rate also triggers a rise in HMRC interest rates, already at a punishing 7.75% and set to go up to 8% in the next few weeks, for any taxpayers with overdue tax bills.
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