By Amara Osei

The Bank of England raised its Bank Rate (the benchmark rate for UK lending) by 25 basis points to 4% in a unanimous 9-0 vote, its first increase since August 2023. Prosperity Institute economist Emmanuel Igwe supports the move, arguing that persistent inflation and the prospect of wider price and wage increases outweigh the case for blaming the Iran war alone.

The voting shift was substantial: only 3 of 9 Monetary Policy Committee (MPC) members voted to raise rates in September. Economists had expected a 7-2 split at this meeting, with dissenters preferring a hold, so the unanimity was unexpected. Catherine Mann wanted 4.25%, while eight members supported the final 4% rate.

Why did the Bank treat the Iran shock as more than temporary?

The Iran war shaped the MPC’s deliberations for most of the year, yet the Bank said the energy shock had not yet spread into wider wages and prices. Igwe reads unanimity as a refusal to wait for that pass-through, rather than an assumption that Iran alone determines UK inflation.

Temporary oil-price increases normally raise the price level once rather than sustain inflation. The larger risk lies in second-round effects (continued price and wage increases): businesses protect margins by raising prices, while workers seek compensation for higher living costs.

How high can inflation go?

UK consumer-price inflation rose from 3.1% in August to 3.5% in September, according to Office for National Statistics data, with fuel prices driving most of the increase. In the Bank’s October Decision Maker Panel, 68% of businesses linked intended price rises to energy shocks.

The Office for Budget Responsibility (OBR) expects inflation to peak at 3.75% early next year. The Bank’s forecast, released with this decision, is more severe, projecting inflation of up to 5% by mid-2027; its decision reflected that risk.

Britain was the fastest-growing economy in the Group of Seven (G7) in the first half of the year, although Igwe describes that achievement as a low bar. Even modest growth met knock-on price effects from global energy trade, and the Bank said those effects influenced its decision to raise rates.

Who bears the higher costs?

The distribution of costs depends on each household’s mortgage contract, not simply on the 25-basis-point policy move.

• Tracker mortgages: Payments rise immediately.
• Variable-rate loans: Lenders pass on the increase within one month.
• Fixed-rate mortgages: Existing payments remain initially insulated, but borrowers face a sharp increase when the deal ends and they take out a new mortgage.
• Cash savings: Savers, including prospective first-time buyers with deposits, would earn more interest after a long period of low returns.

Firms already carrying inflated energy bills from the Iran war now face higher borrowing costs. Small businesses dependent on variable-rate credit lines (borrowing facilities) and overdrafts face the pressure first, threatening the investment that supported this year’s growth and squeezing profits well into next year.

Markets price up to four additional quarter-point increases by end-2027. If that path materialises, higher interest expenses will compound the energy burden and compress business profits further.

What does the decision mean for the Treasury?

The move amounts to a verdict on the Chancellor’s first Budget. Fiscal headroom (the margin available to absorb fiscal shocks) has fallen to £15bn from £23.6bn in March, while the OBR estimates higher-than-expected inflation will add £14bn a year to government borrowing costs this Parliament.

Additional rate increases would raise debt interest and consume more of that reduced buffer, leaving the Treasury with less room to absorb the combined energy and borrowing shock.

The New Economics Foundation calls the decision “an act of economic self-harm.” Igwe rejects that assessment and treats hesitation as potentially fatal because businesses are already preparing to raise prices; acting now may reduce the intensity of later increases.

Higher rates can restrain domestic demand, but they cannot lower energy prices or open the Strait of Hormuz. Monetary policy (central-bank management of interest rates) can limit second-round inflation; it cannot remove the underlying supply shock.

Can the energy pressure now ease?

Oil prices fell after the US midterm elections this week as investors expected de-escalation in Iran. Governor Andrew Bailey did not promise additional increases, and committee doves Alan Taylor and Swati Dhingra viewed the hike as insurance rather than a firm conviction that the Bank would remain at 4%.

What should the government do next?

The Treasury’s immediate task is to address supply-driven inflation rather than rely on the Iran narrative. Its £4bn support package includes a £100 energy rebate, yet the rebate cuts consumer-price inflation (CPI) by only 0.1 percentage point and leaves the underlying trajectory unchanged.

The Chancellor must confront inflated energy costs, much of which has nothing to do with Iran. Igwe proposes removing green and social levies (policy charges on household bills), citing Prosperity Institute research that green initiatives will add the equivalent of £1,400 per household by 2031.

The stakes extend to the UK-EU summit on 20 November, where Andy Burnham’s proposed alignment on carbon costs could add further pressure. Public tolerance for blaming Iran may be temporary; Igwe warns that “neither the Bank nor the government can get away with it indefinitely.” His conclusion is that the government must address root costs before treating external conflict as a complete explanation.