The Bank of England’s decision to raise interest rates to 4% is the most consequential UK business and finance story shaping markets today, as policymakers confront an inflation outlook worsened by a sharp rise in energy costs.

The Monetary Policy Committee voted by eight to one to increase Bank Rate by 0.25 percentage points, while one member backed a larger half-point rise. The Bank expects consumer price inflation to reach about 5% by the middle of 2027, according to reporting published this week.

Energy shock changes the inflation outlook

The rate increase reflects concern that higher wholesale energy prices could feed into a broader and more persistent rise in prices. Brent crude and UK gas futures were substantially higher than at the time of the Bank’s previous forecast, with oil averaging $108 a barrel and gas futures 216 pence per therm over the relevant period.

UK inflation had already accelerated to 3.5% in September, up from 2.6% in June. The Bank said the economy had proved more resilient than expected, increasing the risk that higher energy costs could spread through wages, services and business supply chains.

Businesses face a difficult trade-off

Companies have so far absorbed part of the energy shock through lower margins, fixed-price contracts and hedging. That has limited the immediate pass-through to customers, but sustained cost pressure could eventually force businesses to raise prices or reduce investment.

Private-sector regular pay growth stood at 3% in August, while other business and labour-market indicators pointed to wage growth of roughly 4%. The Bank is watching closely for signs that pay settlements could prolong inflationary pressure.

Borrowing costs and the housing market

Higher Bank Rate will keep pressure on mortgage borrowers and companies refinancing debt. The impact is also being felt in the housing market: the UK House Price Index fell 0.8% in the three months to August compared with the previous three months.

For businesses, the increase raises the cost of working capital and investment finance at a time when demand remains uneven. Lending growth has remained strong, but the prospect of rates staying higher for longer is likely to make corporate borrowers more selective.

Markets reassess the path ahead

The decision has also kept sterling and UK equities sensitive to future guidance. Market coverage on 7 November showed the FTSE 100 lower, while sterling weakened against the dollar and the euro.

The central question for investors is whether the latest increase marks the start of a more aggressive tightening cycle or a one-off response to the energy shock. The divided vote, including one call for a 4.25% rate, suggests that policymakers remain concerned about inflation even as the broader economy faces slower growth.

For households and companies, the immediate message is clear: the era of rapidly falling borrowing costs has been pushed further away, while the Bank’s inflation forecast points to continued pressure on budgets and margins through 2027.