BoE recap: Split vote delivers rate hike as Bank warns energy shock is not over

4.00% is the Bank of England (BoE)’s new Bank Rate. Eight policymakers supported the 25-basis-point rise, while Catherine Mann favoured a larger 50-basis-point increase. Alongside the decision, the BoE substantially raised its inflation projections and cautioned that energy pressures could necessitate additional tightening.

Roughly 5% in Q2 2027 is now the inflation peak projected by the “Old Lady”, compared with its previous forecast of 3.2% in late 2026. A return in CPI inflation to the 2% target is not expected until Q3 2028. Under the Bank’s adverse scenario, a worsening energy shock would push inflation to 6.2%.

Inflationary pressure already in the pipeline was sufficient to justify the increase, according to Governor Andrew Bailey. He warned that further rises could follow and that the Middle East crisis might not yet be over. However, he stressed that the decision did not signal an inevitable sequence of rate increases. Evidence of second-round effects remains limited in the Bank’s assessment, although stronger-than-expected activity has reinforced the case for tighter policy.

An upgraded near-term growth outlook sits alongside a mixed economic picture. The BoE now forecasts GDP growth of 1.6% in 2026, followed by a slowdown to 1.3% in 2027 and 1.2% in 2028. Unemployment is expected to edge higher, while pay growth is now projected to exceed earlier estimates. The government’s budget is forecast to curb inflation temporarily, with that effect likely to reverse later.

Despite its broadly hawkish tone, the Bank stopped short of committing to further tightening. Another near-term rise has a case, in the view of MPC members Lombardelli and Pill, while Greene indicated that additional increases would probably be necessary. Bailey, by contrast, described current policy as broadly sufficiently restrictive. He also attributed part of the rise in market interest rate expectations to risk premia rather than the Bank’s projected policy path. By raising rates, the MPC has sought protection against a worse inflation outcome while deliberately leaving its next decision open.