Bank of England hikes interest rate for the first time since Iran war, warns inflation will near 5%

The Bank of England announced its first interest rate hike in over three years on Thursday, as it raised its key rate by 25 basis points to 4%.

The widely anticipated move marked the bank's first hike since Aug. 2023, and made it the last major central bank to embark on a tightening cycle since the U.S. and Israel went to war with Iran eight months ago.

The majority of the bank's Monetary Policy Committee voted for the quarter-point hike, with the motion passing by 8 votes to 1. The dissenting member voted to raise the bank's key interest rate by 50 basis points to 4.25%.

"The conflict in the Middle East is now in its ninth month," the MPC said in a statement Thursday. "Global energy prices have continued to rise from an already elevated level."

Policymakers said they now expected U.K. inflation to rise to "about 5%" by the middle of 2027.

"It is then projected to fall as the impact of rising energy prices on 12-month inflation rates fades, and still restrictive monetary policy bears down on inflation," they said.

Ahead of the decision being announced, markets had been pricing in more than a 99% chance of a rate hike, according to LSEG data. Traders were also pricing in a one-in-four chance of a further hike in December.

Data released earlier this month showed that the U.K.'s annual inflation rate jumped to 3.5% in September, driven by the surging cost of motor fuels.

As a net energy importer, the U.K. is particularly vulnerable to external energy shocks — such as the one caused this year by the Iran war.