The Bank of England has increased interest rates by a quarter of a percentage point to 4%, adding to borrowing costs for homeowners and the buy-to-let sector as inflationary pressures continue to build.
The widely expected increase was supported by eight members of the Monetary Policy Committee (MPC), with the ninth, Catherine Mann, voting for a larger increase of 0.5 percentage points.
It is the first rise since August 2023 and comes in response to higher energy prices caused by the continuing conflict in the Middle East.
Inflation expected to reach 5%
The impact of higher oil and gas prices has also led to the Bank making substantial raises to its inflation forecasts in its latest Monetary Policy Report.
Consumer price inflation reached 3.5% in September and is now expected to rise to around 5% by the middle of 2027, before gradually falling back towards the Bank’s 2% target.
Its forecast for the final quarter of 2027 has increased from 2.1% to 4%, although it still expects it to return to 2% by late 2028.
The Bank has also downgraded its economic growth forecast for the year to the end of 2027 from 1.4% to 1%, as higher energy prices and borrowing costs increasingly hit household spending and business investment.
However, economic activity has been stronger than expected in recent months, raising concerns that businesses may be more able to pass higher costs on to customers, which could keep inflation elevated for longer.
What it means for mortgage rates
Today’s increase will have an immediate impact on borrowers with tracker mortgages linked directly to Bank Rate.
For everyone else, the picture is more complicated.
Fixed mortgage rates are largely determined by swap markets, which reflect expectations about future interest rates. Much of the anticipated increase in Bank Rate has therefore already been priced into mortgage costs.
Some lenders’ rates are even heading in the opposite direction. Nationwide has just announced reductions of up to 0.15 percentage points across its fixed-rate mortgage range, and Virgin Money also reduced selected two- and five-year deals.
However, these relatively small changes come after substantial increases in mortgage costs during the rest of the year.
The Bank’s latest report highlights this longer-term trend, with average quoted rates on two-year fixed mortgages rising by around 0.6 percentage points since July. Mortgage approvals for house purchases also fell by 8% in the three months to September compared with the previous three months.
For the buy-to-let sector, higher borrowing costs will continue to put pressure on rental profitability and the financial viability of new purchases, particularly where mortgages account for a large proportion of the investment.
However, limited-company landlords are better protected because they can offset their full mortgage costs rather than just at the basic rate.
Will interest rates rise further?
The Bank has made clear that further increases are possible, but has stopped short of committing to concurrent rises.
Speaking at today’s press conference, Governor Andrew Bailey said:
“Today’s increase shouldn’t be seen as the first in an inevitable long sequence of hikes.”
However, he also warned that another increase was likely unless the Middle East conflict was resolved.
And the outlook has become even more uncertain following Donald Trump’s defeat in the US midterm elections, raising questions about how the unpredictable president will respond to such a seismic political setback.
Oil prices fell sharply following the election results amid speculation that Trump could seek a negotiated settlement with Iran. However, the possibility of further military escalation remains, with potentially significant consequences for energy prices, inflation and future interest rates.
