A person shields themselves from the rain while walking near the Bank of England building on the day the Monetary Policy Committee lowered interest rates, in London, Britain, Dec.18, 2025.
Toby Melville | Reuters
The Bank of England announced its first interest rate hike in over three years on Thursday, raising 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.
Iran war intensifies inflation pressure
Bank of England Governor Andrew Bailey said in the November Monetary Policy Report that without “real progress towards settling the conflict in the Middle East… risks to energy prices, and so to inflation, are to the upside.”
“Without news which softens the risks to inflationary pressures, I can see the argument for a further increase in rates and thereafter taking a more conditional approach, dependent on the evidence on energy prices and inflation dynamics,” he said.
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.
The MPC’s most hawkish member, Catherine L Mann, said she had voted for greater tightening than her peers because research pointed to “non-linear inflation risks.”
“My recent votes to increase Bank Rate by 25 basis points represented a ‘down payment’ to lean against second-round effects, reinforce credibility, and uphold ‘good policy’,” she said in comments published in the MPC’s policy statement.
“The economy has crossed the estimated statistical threshold into a high inflation-tight labour market regime where the asymmetric behavioural responses of households and firms support more robust second-round effects,” Mann added. “A different research approach estimates that the economy may well have breached the policy credibility threshold, which worsens the policy trade-off… From a risk management and credibility perspective, a 50-basis point hike in Bank Rate is ‘good policy’.”
