BoE recap: What does a split rate hike signal as the Bank warns the energy shock is not over?

Further monetary tightening could be needed to counter energy pressures, the Bank of England (BoE) warned as it sharply revised its inflation forecasts upwards and raised its Bank Rate by 25 basis points to 4.00%. Eight policymakers supported the increase, while Catherine Mann favoured a larger 50-basis-point rise.

A peak of roughly 5% in Q2 2027 is now forecast by the “Old Lady”, replacing its previous projection of 3.2% in late 2026. CPI inflation is unlikely to return to the 2% target before Q3 2028. In the Bank’s adverse scenario, a worsening energy shock would push inflation to 6.2%.

Inflationary pressures already in the pipeline were sufficient to justify the increase, according to Governor Andrew Bailey. While warning that the latest hike might not be the last and that the Middle East crisis might not be over, he stressed that the decision did not signal an inevitable sequence of rate increases. Evidence of second-round effects remains limited in the Bank’s assessment, although stronger-than-anticipated activity has strengthened the case for tighter policy.

An improved near-term growth outlook sits alongside a mixed broader economic picture. Having raised its near-term forecasts, the BoE now projects GDP growth of 1.6% in 2026, followed by a slowdown to 1.3% in 2027 and 1.2% in 2028. A gradual rise in unemployment is likely, yet pay growth is now forecast to exceed earlier estimates. The government’s budget is expected to lower inflation temporarily, with that effect likely to reverse later.

Despite the broadly hawkish tone, the Bank stopped short of committing to further tightening. A near-term increase has a case in its favour, according to MPC members Lombardelli and Pill, while Greene indicated that additional hikes would probably be necessary. Bailey, however, described the existing policy stance as generally restrictive enough. He also attributed part of the rise in market interest rate expectations to risk premia rather than the Bank’s projected policy path. By raising rates, the MPC has sought protection against a worse inflation outcome while intentionally leaving its next decision open.