Bank of England warns inflation will surge by next summer, as it hikes UK interest rates to 4% – business live

The City of London has not been rocked by today’s interest rate decision.

UK bond price have dipped a little, which has pushed up the yield (interest rate) on two-year gilts by 2 basis points (0.02 of a percentage point) to 4.76%.

The pound is flat against the US dollar.

The Bank’s two most dovish policymakers – Alan Taylor, and Swati Dhingra – both voted for today’s hike, but are indicating they’d be reluctant to lift borrowing costs further.

Some economists had predicted that these two doves would have vooted to hold rates today.

Alan Taylor says today’s rate rise is ‘insurance’, rather than the start of a cycle of hikes.

In the minutes from this week’s meeting, he says:

It is essential to communicate, and for markets to understand, that, as of now, this is not the start of a hiking cycle: policy isn’t on a pre-set, unconditional path. The risk is curve dislocation and unwarranted tightening in financial conditions. Rather, from an already restrictive position, this is a risk-management ‘one-for-now’ insurance hike

Swati Dhingra also uses the ‘insurance’ word, explaining:

Raising Bank Rate by 25 basis points provides additional insurance against upside risks from stronger pass-through and firmer growth in demand.

To support maintaining Bank Rate at a higher level for an extended period, I would need to see clear evidence of a recovery in firms’ pricing power and households’ purchasing power alongside signs of mutually reinforcing wage and price pressures.

Chancellor of the Exchequer John Healey MP has responded to today’s interest rate hike, saying:

“The Iran conflict is reaching deep into the pockets of families and businesses here at home.

“In my Budget I acted to give some breathing space to families and businesses. Twenty million households will get a £100 energy payment, I extended the tax cut on electricity bills and froze fuel duty.

“I also set out the course ahead to get costs down for good. That includes big changes to our energy system so Britain is better protected from global shocks in the future.”

Today’s interest rate decision was taken by the nine members of the Bank’s monetary policy committee.

Eight of them – Andrew Bailey, Sarah Breeden, Swati Dhingra, Megan Greene, Clare Lombardelli, Huw Pill, Dave Ramsden and Alan Taylor – voted for the quarter-point rise.

The Bank says:

The duration and scale of the energy price increase had generated sufficient inflationary pressures in the pipeline to warrant an increase in Bank Rate. There was a range of views among these members about the extent to which the underlying disinflationary process prior to the conflict had continued, the degree of spare capacity in the economy, and the restrictiveness of the current monetary policy stance.

These members agreed that, although evidence of second-round effects had been limited, the availability of evidence would increase over time, and would continue to need close monitoring, along with the implications of developments in energy prices for medium-term inflationary risks.

The outlier was Catherine L Mann, who voted for a half-point rise in Bank rate.

Mann is concerned about the “non-linear inflation risks” facing the UK, and keen to stamp on higher wage demands.

She explains, in the minutes of the meeting,

Households are particularly attentive to energy and food price inflation, which may be reflected in 2027 wage demands. With CPI inflation at 3.5% in September, 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.

A different research approach estimates that the economy may well have breached the policy credibility threshold, which worsens the policy trade-off. Moreover, a substantial inflation risk premium is in the UK yield curve, reflecting five years of above-target inflation, where it has averaged 4.7%. Therefore, from a risk management and credibility perspective, a 50-basis point hike in Bank Rate is ‘good policy’.

The Bank of England is also warning that UK inflation is set to hit 5% by the middle of next year, as it explains why it raised interest rates today.

That would be a serious, painful acceleration in prices – inflation was clocked at 3.5% in September – hurting households who are already struggling under the cost of living crisis.

The Bank pins the blame on the Iran war saying:

The conflict in the Middle East is now in its ninth month. Global energy prices have continued to rise from an already elevated level. UK CPI inflation increased to 3.5% in September.

It is now expected to rise to around 5% by the middle of next year. 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.

Newsflash: The Bank of England has raised interest rates for the first time in more than three years, as policymakers try to fight rising inflation.

Its monetary policy committee has voted to raise Bank rate from 3.75% to 4%, the first rise since August 2023.

The move was widely expected by markets, as UK inflation recently hit 3.5%, further above the Bank’s 2% target.

Excitingly, one member – Catherine Mann – wanted a half-point hike!

The Bank says:

At its meeting ending on 4 November 2026, the Monetary Policy Committee (MPC) voted by a majority of 8–1 to increase Bank Rate by 0.25 percentage points, to 4%. One member voted to increase Bank Rate by 0.5 percentage points, to 4.25%.

Excitement is building, as the City prepares for the Bank of England’s latest interest decision to be announced at noon sharp.

A rate hike is nailed on, according to the money markets – they show that a quarter-point rise to 4%, from 3.75%, is a 99.96% chance.

That part of the decision, therefore, probably won’t be the important part of the story.

George Vessey at cross-border payments company Convera, explains:

With markets assigning around a 95% probability to such an outcome, attention instead turns to the vote split, updated forecasts and Governor Bailey’s guidance. Markets currently price almost 100bp of additional tightening through late 2027, a path that looks increasingly ambitious in our view. If the BoE pushes back against those expectations, the resulting dovish repricing in rates could prove more important for sterling than the hike itself.

Britain’s share index of medium-sized companies has hit a record high today.

The FTSE 250 index, which includes companies who are too small for the FTSE 100, has hit a new peak – it was up 1% or 261 points to a high of 25,176 points.

In the pharmaceutical world, AstraZeneca has reportedly made a $10bn offer to buy US biotech firm Rhythm.

According to the Wall Street Journal, AstraZeneca made an offer last month – a deal would allow it to expand its portfolio of rare disease treatments, as Rhythm ​develops therapies for rare neuroendocrine disorders.

Shares in Rhythm jumped yesterday afternoon after the WSJ said AstraZeneca had offered to pay $124 a share. This pushed Rhythm’s shares up by 28% to $110.68. They’re slightly lower (-3%) in pre-market trading.

AstraZeneca has declined to comment.

The pound is “enjoying a significant resurgence” as the UK’s reputation for stability returns, argues Susannah Streeter, chief investment strategist at Wealth Club.

Slightly stronger-than-expected growth, expectations that the Bank of England will raise interest rates today, and signs of a rapprochement with Europe are all helping to bolster the currency.

There is a sense that the UK is beginning to be viewed in a more favourable light by international investors, with its reputation for stability starting to regain some lustre.

Political and economic difficulties across the Channel, particularly in France, are also providing a stark contrast. And the improving relationship with Europe could offer a further boost to growth further down the line, if it translates into fewer trade frictions and closer economic cooperation.

Oil markets sold off aggressively because the political power shift within the US could lead to “more scrutiny over the war, while funding it could become more difficult”, according to market analysts at Dutch bank ING.

“How all this plays out is still highly uncertain,” ING’s analysts added. “Therefore, the degree and speed to which the oil market has sold off seems to be overdone.”

Professor Brenda Shaffer, a senior fellow at the Atlantic Council Global Energy Center, told the Guardian that although the Democrats won support by galvanising the public opposition to rising energy costs they would struggle to address the crisis that helped the party to victory.

Shaffer said:

“They may blame the Republicans for the closure of the Strait of Hormuz, and continue to do so, but why would Iran compromise now?”

She added that the record high diesel prices in the US which have pushed up costs across the economy may also prove difficult to tackle if Democrats are unwilling to curtail Ukraine’s military attacks on energy infrastructure in Russia, one of the world’s biggest diesel exporters.

Donald Trump’s mid-term election defeat has caused Europe’s gas prices to tumble as global energy markets bet on a quicker than expected resolution to the strait of Hormuz crisis.

The market price for oil, gas and fuels across global markets plummeted after the US President conceded that the US-Israeli war on Iran had angered voters and caused his part to lose control of the House of Representatives and the Senate.

The admission triggered oil and gas prices to fall sharply as the election results emerged on the hope that the result may galvanise US efforts to end the conflict, which has disrupted energy supplies through the strait of Hormuz for over 8 months.

Europe’s gas benchmark fell to three week lows of €84.36 per megawatt hour on Thursday after climbing to a four year high of almost €104 per megawatt hour late last week as colder weather prompted companies to begin drawing from Europe’s historically low gas storage facilities.

Europe’s gas stores are only around 74% full, well below the five-year seasonal average of 90%. In Germany, Europe’s biggest economy and home to the EU’s largest gas stores, gas reserves stand at below 61%.

The gas market slump followed a sharp drop in the global oil benchmark, Brent crude, which fell 8.7% lower on Wednesday to below $95 a barrel, its lowest price in two months.

The pound might strengthen today, depending on what the Bank of England says at lunchtime.

With a rate hike widely expected, the City will be more interested in how united Bank policymakers are on the decision, and what guidance the BoE gives about future rate hikes.

Charalampos Pissouros, senior market analyst at Trading Point, explains:

As for the pound, traders are keeping their gaze locked on the Bank of England decision today. With UK inflation accelerating to 3.5% year-on-year in September, investors are nearly certain that policymakers will raise rates for the first time since August 2023.

Therefore, the pound is unlikely to be driven by the hike itself, but by the vote, the updated economic projections and the guidance on further tightening. A unanimous vote for an increase, upwardly revised inflation projections and strong willingness to continue with more rate increases could add fuel to sterling’s engines.

Newsflash: The pound has hit its highest level since its crash after the Brexit referendum a decade ago.

Data released by the Bank of England shows that the pound reached its strongest level against a basket of other currencies since 23 June 2016 – the day of the EU vote - yesterday.

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This follows the drop in the value of the US dollar after the Midterm elections, but also reflects the pound’s recent strength against other currencies such as the euro and the yen.

The pound has also benefited from expectations that the BoE will raise interest rates at noon today, which makes it more lucrative for investors to hold funds in sterling.

The dollar weakened generally yesterday, amid a risk-on rally that saw money flow into other currencies.

Jim Reid of Deutsche Bank explains:

When it came to the market reaction, there was relief among investors that the results weren’t disputed, which helped to reduce political uncertainty. Moreover, the prospect of divided government also eased concerns about the fiscal trajectory, given it’ll now be more difficult to pass tax cuts or spending packages.

Today’s 10-year high relates to the sterling “effective exchange rate index” (EERI), which tracks the pound against a basket of other currencies.

Calculated by the Bank of England, this index has now hit 86.5372.

On the index, 100 equals the value of the pound in January 2005.

Back in 2016, the pound hit a 31-year low against the dollar. That pulled the EERI down to 84.441 on 24 June 2026, down from 87.9248 on the day of the referendum.

The EERI fell as low as 73.1 on March 23, 2020, in the Covid pandemic.

Ouch! Activity in the UK’s construction sector fell sharply last month, new data shows.

The latest Constrution PMI report, just relased, shows there was a “sharp and accelerated reduction in business activity during October”.

Housebuilding work slumped in the month, the report says:

Residential activity (index at 35.1) was by far the weakest performing segment, with the latest reading the lowest since December 2025 and indicative of a steep drop in house building.

Anecdotal evidence cited low consumer confidence, elevated risk aversion and headwinds from rising borrowing costs.

The overall Construction PMI, produced by S&P Global, has dropped to 43.6, down from 46.1 in September. That’s the lowest reading since June, and further below the 50-point mark showing stagnation.

One question pondered by investors and economists is how high UK interest rates might go.

Professor Costas Milas, of the Management School at the University of Liverpool, has published new forecasts for Bank Rate, in a blog post for the LSE Business Review.

He reports:

1. A Bank Rate of 4% (almost certainly today) is just outside the upper bound of neutral rates; so, policy is “borderline” restrictive. That said, I am critical of the whole concept of neutral rates and agree with [Fed chair] Kevin Warsh*.

2. The models I use suggest that Bank Rate will peak at 4.25% in mid 2027. We could see Bank Rate close to 4.6% in mid-2027 if, and only if, the BoE thought (unlikely at the moment) that inflation would stay as high as 4.2% up until 2028Q1.

[* – Warsh recently said the neutral rate is “useful academically” but has no “operational effect” on policy decisions]

Norway’s central bank has left interest rates on hold, but warned it could raise borrowing costs in the months ahead.

Norges Bank voted to maintain its policy rate at 4.5%, despite inflation continuing to run over its target.

Governor Ida Wolden Bache says:

“Inflation is too high. It will likely be necessary to keep the policy rate elevated for a time, and we are prepared to raise the policy rate if needed to bring inflation down to target within a reasonable time horizon.”

While financial markets are welcoming the US midterm results, there are still some key risks, cautions Ajith Nair, chief investment officer of Isio Investment Management.

Nair explains that the reduced political uncertainty is helpful for markets – but that doesn’t mean that all the major risks have disappeared":

“The immediate reaction has clearly been positive and provides some welcome respite after the recent wobble in AI-related stocks. Markets appear to be taking comfort from the idea that the election result means the Trump administration will face greater constraints in pursuing some of the more disruptive parts of its policy agenda over the final two years of the presidency.

“That may ultimately prove correct, but investors should be careful about getting too comfortable with that assumption. A more challenging Congress does not mean the President is powerless, particularly when it comes to trade and foreign policy. If markets are effectively betting on two relatively uneventful years from Washington, that assumption could still be tested.”