BoE raises rates to 4.00% as British Pound remains broadly unchanged against Euro

• The BoE’s widely anticipated rate rise leaves EUR/GBP close to multi-month lows.
• Interest rates rise to 4.00% as the BoE delivers its first increase since 2023.
• With inflation forecast to reach around 5% by mid-2027, Governor Bailey signals that further tightening remains possible.

EUR/GBP is trading at around 0.8331 at the time of writing, a modest decline of 0.05% on the day that leaves the pair close to levels last recorded in April 2025. The British Pound (GBP) lacks a clear direction against the Euro (EUR) on Thursday, with the Bank of England’s (BoE) interest rate increase prompting little market response as it had already been priced in.

An 8-1 vote by the Monetary Policy Committee (MPC) on Thursday saw the BoE lift its benchmark interest rate by 25 basis points (bps) to 4.00%. Catherine Mann, an external MPC member, preferred a larger rise of 50 bps to 4.25%.

By raising rates for the first time since 2023, the BoE joins other major central banks tightening monetary policy to curb inflation fuelled by higher energy costs arising from the war in the Middle East.

Behind the decision are mounting concerns that a protracted conflict could prolong elevated inflation. Following a rise to 3.5% in September, UK Consumer Price Index (CPI) inflation is now forecast to reach around 5% by the middle of 2027.

Policymakers concluded that “the degree of inflationary pressure in the pipeline is now sufficient to warrant an increase in Bank Rate.” That assessment came despite limited evidence so far that higher energy costs are passing through to broader prices and wages. Economic activity exceeding expectations provided a further argument for tightening policy.

A further rate rise remains an option for Governor Andrew Bailey if inflation risks fail to subside. “Without news which softens the risks to inflationary pressures, I can see the argument for a further increase in rates,” Bailey said. In a similar assessment, Chief Economist Huw Pill argued that one increase of 25 bps would be unlikely to suffice.

The MPC nevertheless emphasised that “monetary policy is not on a pre-set path,” making subsequent decisions dependent on energy prices and their effects on wages, broader prices and economic activity. To bring CPI inflation back to its 2% target over the medium term, the Committee said it would change Bank Rate as required.