Bank of England set to raise interest rates for first time in three years

Policymakers at the Bank of England are anticipated to increase the benchmark interest rate on Thursday, marking the first rise in more than three years. The move is widely forecast to lift the rate from 3.75% to 4%, a decision that will raise the cost of borrowing for households and businesses while offering higher returns for savers. The announcement is scheduled for 12:00 GMT, with close attention expected to be paid to any signals from the Monetary Policy Committee regarding the future trajectory of monetary policy.

The decision follows a period in which the Bank rate has declined from its peak of 5.25% during 2023 and 2024, although the committee has maintained the rate at its current level for the last six consecutive meetings. Analysts suggest that rising inflation, driven primarily by the cost of petrol and diesel, is compelling policymakers to act. Chris Cheverall, head of UK at trading platform CMC Markets, noted that the focus is shifting from whether the rate reaches 4% to what follows thereafter. He highlighted the challenge facing the Bank, which must balance inflation that remains above target against an economy where the growth outlook has weakened significantly.

The Consumer Prices Index, the primary measure of inflation, has been trending upwards and is expected to continue rising. It stood at 3.5% in the year to September 2026, up from 3.1% the previous month, and remains well above the central bank’s 2% target. The ongoing impact of the Iran war has filtered through to UK inflation, particularly affecting energy and fuel costs. Millions of domestic energy customers are preparing for significant price increases in January, further complicating the economic landscape for policymakers.

The Bank of England last raised rates in August 2023. The base rate determines the cost for other banks and building societies to borrow money, which in turn influences the interest rates charged on mortgages and paid on savings. A rise in the Bank rate would have an immediate impact on the 510,000 holders of tracker mortgages. According to calculations by the banking trade body UK Finance, a 0.25 percentage point increase would result in a £31 rise in monthly repayments for those with a typical tracker home loan.

For the 470,000 mortgage holders on variable deals, the impact would depend on their lender’s response, though a typical 0.25 percentage point rise would mean an additional £14 per month in repayments. Those on fixed-rate deals would not see an immediate change in monthly payments, but their future remortgage options would be affected. Lenders have already factored in the expected rate rise when quoting new deals. As of 4 November, the average two-year fixed residential mortgage rate was 5.96%, while the average five-year rate stood at 5.99%, according to financial information service Moneyfacts.

This means individuals rolling off five-year deals face substantially higher mortgage bills. Broker L&C indicated that average rates offered by the ten largest lenders suggest some borrowers now face paying almost £5,000 more annually on a £200,000 mortgage over 25 years compared to those who secured deals in 2021, when the average five-year fixed remortgage rate among major lenders was 1.30%. Consequently, some borrowers are considering switching to tracker products in the hope that rates may be lower, despite the anticipated increase. Rachel Springall from Moneyfacts advised that the right choice depends on borrowers’ confidence in their ability to withstand future rises. Meanwhile, savers may benefit from improved interest rates in light of the expected hike, as lenders and policymakers assess the UK’s economic outlook in the context of international events.