Bank of England raises interest rates to 4% as inflation climbs

The Bank of England has increased the UK base interest rate from 3.75% to 4%, marking the first rise in more than three years. This decision follows a period where the central bank held rates steady at its previous six meetings. The move is intended to curb rising prices, as inflation has accelerated due to global energy and fuel cost increases stemming from the conflict between the United States, Israel, and Iran.

The rate hike impacts millions of households and businesses by influencing the cost of borrowing and the returns on savings. For borrowers, particularly those with variable-rate mortgages and loans, the increase in the base rate typically leads to higher monthly payments. Conversely, savers may see improved interest rates on their accounts, although experts advise that those who remain in older, closed accounts may miss out on the best available deals. The central bank’s primary objective is to keep inflation near its 2% target, a goal that has been challenged by recent economic shocks.

Background

The trajectory of UK interest rates has shifted significantly in recent years. The base rate peaked at 5.25% in August 2023, a level maintained until August 2024, when the Bank of England began a cycle of cuts. Five subsequent reductions brought the rate down to 4%, with further holds in September and November 2025. A cut in December 2025 was followed by six consecutive holds in 2026, spanning January, March, April, June, July, and September.

Earlier in 2026, analysts had predicted two rate cuts, with the first expected in spring. However, the outbreak of military strikes between the US, Israel, and Iran in February disrupted these forecasts. The conflict caused sharp initial spikes in oil prices, which moderated during ceasefires but rose again in July when attacks resumed in the Strait of Hormuz. These energy disruptions have driven up petrol and diesel prices in the UK. The Office for National Statistics reported that the Consumer Price Index (CPI) climbed to 3.5% during the twelve months ending in September 2026, an increase from 3.1% recorded in the preceding month. This is well above the 2% target and represents a reversal from the decline seen since the 11.1% peak in October 2022, which was triggered by Russia’s invasion of Ukraine.

Why it matters

The rate rise has immediate implications for both consumers and businesses. For firms, particularly small businesses with variable-rate loans, the cost of borrowing to invest has increased. This financial pressure may limit their ability to create new jobs or offer wage increases. Mitchell Barnes, chief executive of 3D parts manufacturer Ryse 3D, noted that rising costs force companies to evaluate employee expenses more strictly. He suggested that businesses may respond by increasing automation and robotics to improve efficiency, potentially leading to reduced employment across various sectors.

For households, the impact is mixed. While savers benefit from higher returns, those who have not shopped around for better rates may be disadvantaged. Rachel Springall from Moneyfacts noted that individuals holding £20,000 in closed accounts missed out on an additional £139 over the last three years relative to those using on-sale easy-access products. Additionally, renters may face higher costs, as rising bank rates can increase expenses for landlords, which may be passed on through rent increases. The central bank aims to reduce demand for goods and services to limit further price rises, a strategy that inherently slows economic activity.

What happens next

The Bank of England will continue to monitor inflation data to determine future rate movements. With CPI currently at 3.5% and expected to rise further due to ongoing energy cost pressures, the central bank faces the challenge of balancing the need to control inflation against the risk of stifling economic growth. The outcome of the US-Israel-Iran conflict and its effect on global oil supplies will remain a critical factor in the Bank’s decision-making process for upcoming meetings.