The Bank of England raised rates to 4% because of the Iran war. What happens next depends on oil

On Nov. 5, the Bank of England raised its main interest rate for the first time since August 2023. Bank Rate went from 3.75% to 4%. The Monetary Policy Committee (MPC) voted 8-1 for a quarter-point rise. The one dissenter, Catherine L Mann, wanted a half-point rise to 4.25% (Bank of England, Nov. 5). The Bank tied the decision directly to the war in the Middle East and the energy prices it has pushed up. It was the last of the major central banks to start raising rates since the war began (CNBC, Nov. 5).

What the Bank decided and why

• The vote. Eight members backed 4%: Andrew Bailey, Sarah Breeden, Swati Dhingra, Megan Greene, Clare Lombardelli, Huw Pill, Dave Ramsden and Alan Taylor. Mann voted for 4.25% (Bank of England minutes, Nov. 5). No member voted to hold.
• The reason. "The conflict in the Middle East is now in its ninth month. Global energy prices have continued to rise from an already elevated level," the MPC said. It judged that "the degree of inflationary pressure in the pipeline is now sufficient to warrant an increase in Bank Rate" (Bank of England, Nov. 5).
• The energy numbers behind it. Front-month Brent crude averaged $108 a barrel and UK front-month gas 216 pence per therm over the 15 UK working days to Oct. 27. That was 38% and 81% above their levels at the time of the Bank's July forecast (Bank of England minutes, Nov. 5).

The inflation path the Bank now expects

• UK consumer price inflation was 3.5% in September. Energy contributed about 1 percentage point of that, mostly through motor fuels (Bank of England minutes, Nov. 5; CNBC, Nov. 5).
• The Bank now expects inflation of around 4 1/2% in the first quarter of 2027 and around 5% in the second quarter, before it falls back as the energy shock drops out of the annual comparison (Bank of England, Nov. 5). The Bank's target is 2%.
• Citing the MPC, The Guardian reports the committee expects the Ofgem household energy price cap to rise to 2,150 pounds in January and again in April, and food price inflation to reach 4.75% by mid-2027 (The Guardian, Nov. 5).

What it means for borrowers and markets

• Two-year mortgage rates had already risen by nearly 0.5 percentage point since early September, before this decision (Bank of England minutes, Nov. 5).
• After the announcement, CNBC reported the 10-year gilt yield at 5.1546% and the two-year at 4.782% on an intraday basis (CNBC, Nov. 5). Markets had priced the hike at more than 99% beforehand, and gave about a one-in-four chance of another rise in December (CNBC, Nov. 5, citing LSEG data).
• Chancellor John Healey said "the Iran conflict is reaching deep into the pockets of families and businesses." He pointed to his budget a week earlier: a 100-pound energy payment for 20 million households, an extended VAT cut on electricity bills and a fuel duty freeze (The Guardian, Nov. 5). The Bank's minutes say the new Budget measures were expected to take about 0.25 percentage point off CPI inflation by the second quarter of 2027 (Bank of England minutes, Nov. 5).

The split inside the committee

• Mann (hawk). She said a research approach "estimates that the economy may well have breached the policy credibility threshold," and that "from a risk management and credibility perspective, a 50-basis point hike in Bank Rate is 'good policy'" (Bank of England minutes, Nov. 5).
• Taylor (dove). He described the move as a "risk-management 'one-for-now' insurance hike" (Bank of England minutes, Nov. 5).
• Bailey (chair). In the minutes he said that without news that softens inflation risks, he could "see the argument for a further increase" in rates. The Guardian also quotes him saying: "Today's increase shouldn't be seen as the first in an inevitable long sequence in hikes. But, unless the conflict in the Middle East is resolved, neither does it seem likely to be the last increase" (Bank of England minutes, Nov. 5; The Guardian, Nov. 5).

Open questions

• December. The next decision is due Dec. 17 (Bank of England). The Bank's own survey of market participants has the median expectation reaching 4.25% in February. Bailey said he could "see the argument for a further increase" without news that eases inflation risks (Bank of England minutes, Nov. 5).
• Oil after the US midterms. Oil fell below $100 a barrel after Democrats won control of Congress, which some investors read as limiting how long the war continues (The Guardian, Nov. 5). If that drop holds, the case for a December rise is weaker.
• Second-round effects. The Bank says there is still "limited evidence" that energy costs are spreading into wages and other prices. Firms have been absorbing costs through hedges and thinner margins. Whether that holds into the new year is what the committee says it will watch (Bank of England, Nov. 5).

Sources: Bank of England Monetary Policy Summary and Minutes, Nov. 5, 2026; The Guardian (Heather Stewart), Nov. 5; CNBC (Chloe Taylor), Nov. 5, citing LSEG.