The Bank of England (BoE) has raised interest rates by 0.25% to 4%, as it attempts to contain rising inflation driven by higher energy prices and disruption to global supplies.

The Monetary Policy Committee (MPC) voted eight to one in favour of increasing the base rate to 4%. One member backed a larger half-point increase, which would have taken rates to 4.25%.

The increase, the first in some three years, was widely expected and takes the base rate higher as inflation, currently at 3.5%, is forecast to reach around 5% by mid-2027. The central bank said the conflict in the Middle East had disrupted energy transportation and supplies, pushing up fuel costs and household utility bills.

The central bank further warned that higher energy costs could feed through into wider prices as businesses pass on increased expenses, although there is currently little evidence of significant knock-on effects on prices and wages.

Governor Andrew Bailey said: "There is now enough inflationary pressure in the pipeline caused by the rise in energy prices that an increase in bank rate is warranted.

"Today’s increase shouldn’t be seen as the first in an inevitable long sequence of hikes. But, unless the conflict in the Middle East is resolved, neither does it seem likely to be the last increase. The MPC will judge the outlook at each meeting, responding as necessary to bring inflation sustainably back to our 2% target."

Gerard Boon, mortgage expert and managing director of Boon Brokers, argued that the bank was placing too much emphasis on reducing demand when inflationary pressures were primarily being driven by restricted supply.

Boon said: “Increasing the cost of mortgages and other borrowing will do nothing to restore that supply.”

On the impact for mortgage borrowers, Boon said those on tracker mortgages linked to Bank Rate should generally see their interest rates increase by 0.25%, while lenders could also raise standard variable rates. Borrowers on fixed-rate deals would remain unaffected until their existing arrangements expired.

However, he said the widely anticipated increase was unlikely to trigger an immediate rise in fixed mortgage rates, as lenders had already factored the decision into their pricing. Variable-rate products were more likely to respond over the coming days and weeks.

Boon also urged mortgage brokers to contact clients and explain how the decision could affect their individual circumstances. “We have an important role in ensuring that borrowers understand the changes and are not left with unnecessary concerns or inaccurate information.”

Kevin Shaw, national sales managing director at LRG, added that the increase was unlikely to have a significant direct impact on mortgage rates, with lenders having already priced in the expected move.

He said: “The bigger impact is on sentiment, because a rate rise makes the headlines. But it’s a moment in time, not a turning point.”

Paula Mercer, sales director at mortgage and protection network Primis, added: “Today’s rate rise – the first in more than three years – will feel like a blow to households but for most borrowers it changes very little. Monetary Policy Committee (MPC) members have spent weeks rolling the pitch for a hike, especially with inflation picking up again.

“Swap markets have priced in at least four hikes over the next year, so today’s increase is already baked into mortgage pricing. That gives us reasonable confidence there won’t be another spike in pricing any time soon, barring a serious deterioration in the Middle East.

“The bigger risk in the short term is what this does to borrower confidence. With 1.8 million fixed-rate mortgages ending in 2026, hundreds of thousands of homeowners still have a deal expiring before the year is out. And there’s no doubt that today’s decision from the MPC will spook them. If you’re a broker, now is the time to pick up the phone and guide your customers through what may be a stressful and uncertain time.”

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