LONDON (AP) — The Bank of England raised interest rates for the first time in more than three years Thursday in a bid to tackle an inflation shock stoked by the Iran war.
The decision to lift the bank’s main interest rate to 4% from 3.75% was widely expected given a recent surge in prices. All nine members of the Monetary Policy Committee voted for a hike, though one backed an even bigger increase to 4.25%.
The increase was the first since August 2023.
The pressure on the bank to act has grown steadily in recent months. When inflation hit an 11-month high of 3.5% in September — well above the bank's 2% target — it cemented market expectations of a rate hike this month, with potentially more to come in 2027.
The main cause behind the spike in inflation this year has been the sharp rise in fuel costs as a result of the Iran war and the ensuing bottlenecks in the Strait of Hormuz, which have squeezed global oil and gas supplies.
The bank’s quarterly economic projections are still to come Thursday, notably those for inflation and growth. Higher interest rates cool the economy by making it more expensive to borrow, thereby bearing down on spending and inflation, but growth too.
Those projections are highly uncertain though — even more so than usual — because the economic outlook hinges hugely on what happens with regard to the Iran war. The heavy losses suffered by the Republican Party in the U.S. midterm elections have resulted in a sharp fall in energy prices.
If the falls in oil and gas prices are sustained over the coming weeks, then the upcoming peak in inflation will likely be lower, which could temper expectations of further rate hikes, not just by the Bank of England.
Others, including the U.S. Federal Reserve and the European Central Bank, have raised rates recently in response to the higher inflation stoked by the Iran war, and forecasts for their interest rate strategy are largely contingent on what happens to the price of energy.
Interest rates in the U.K. had been trending downward from a 15-year high of 5.25% until the U.S. and Israel attacked Iran on Feb. 28.
