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The Bank of England has raised interest rates for the first time in more than three years. On 5 November its Monetary Policy Committee voted by 8–1 to lift Bank Rate by 0.25 percentage points to 4%, with the one dissenting member preferring a larger rise to 4.25%. It was the first increase since August 2023.
The decision reverses the direction of travel that borrowers had grown used to, and it was driven by one factor above all: the energy price shock from the conflict in the Middle East.
Why the Bank acted
According to the Bank’s November Monetary Policy Report, the conflict is now in its ninth month and global energy prices have kept rising from an already high level. Brent crude averaged around $108 a barrel in late October, roughly 70% above its pre-conflict level, while UK wholesale gas futures are about 120% higher. Diesel pump prices are up by around 40% and petrol by around 30%.
CPI inflation rose to 3.5% in September. The Bank now projects it will reach about 5% by mid-2027, with energy alone adding roughly 1.4 percentage points in early 2027 and the Ofgem price cap expected to rise from £1,723 to around £2,150. So far, the Bank sees limited evidence of energy costs spilling over into wider prices and wages, but it judged that the inflationary pressure already in the pipeline justified a rise, especially as economic activity has been stronger than expected.
The Committee stressed that policy is “not on a pre-set path” and will be reassessed at every meeting.
What markets expect next
Financial markets had largely anticipated the move. The Bank’s own survey of market participants points to a median expectation of a further rise to 4.25% in February, before rates ease back to around 3.5% in two to three years. Market pricing is more hawkish, with forward rates implying Bank Rate peaking close to 4.9% by the end of 2027. The Committee’s next decision is due in December.
Mortgages: the biggest impact
For homeowners, the damage was largely done before the announcement. Fixed mortgage rates are priced off swap rates, which had already risen as markets anticipated tighter policy. The Bank notes that quoted rates on two-year fixes at 75% and 90% loan-to-value rose by around 60 basis points over the autumn, and average two- and five-year fixed rates have reached about 6%, according to Moneyfacts data cited by Savills.
The Bank estimates that by the end of 2029, average annual mortgage payments will be around £1,500 higher than before the conflict. Tracker and standard variable rate borrowers will see their payments rise almost immediately.
- Remortgaging soon? Securing a new deal up to six months in advance can protect against further increases; many lenders allow you to switch to a lower rate if prices fall before completion.
- On a tracker? Budget for higher payments now and consider whether a fix offers more certainty.
- Buying? Affordability tests are tighter at higher rates, so get an agreement in principle before you start viewing.
Savers: better returns, but inflation bites
Higher Bank Rate should feed through to easy-access and fixed-term savings rates, although banks tend to pass on increases to savers more slowly than to borrowers. With inflation heading towards 5%, many savings accounts will struggle to deliver a real return. It is worth comparing rates regularly and using the full £20,000 annual ISA allowance, which the Chancellor confirmed in the Budget will remain unchanged for cash ISAs.
Businesses: higher borrowing costs and weaker demand
For companies, the rise adds to an already difficult cost environment. Variable-rate loans, overdrafts and asset finance will become more expensive, and the Bank expects real household incomes to fall in the coming quarters, which could weigh on consumer spending. Firms with refinancing due in 2027 should review their options early, and those exposed to energy-intensive operations should model the impact of the expected rise in energy costs into next year.
The bottom line
The era of falling interest rates has ended, at least for now. The Bank of England is signalling that it will keep policy tight until it is confident the energy shock will not become embedded in wages and prices. For households and businesses, the priority is to lock in certainty where possible and plan for borrowing costs to stay higher for longer.
