Bank of England lifts rate to 4 percent

The Bank of England raised its main interest rate to 4 percent on Thursday, marking the first increase in more than three years. The move reversed a downward trend that had seen rates fall from a 15-year high of 5.25 percent before the United States and Israel attacked Iran on February 28.

Inflation reached an 11-month high of 3.5 percent in September, well above the central bank's 2 percent target. This surge was primarily driven by fuel costs after the Iran war caused bottlenecks in the Strait of Hormuz, squeezing global oil and gas supplies. The rise in prices left the nine members of the Monetary Policy Committee with limited options to counter the inflation shock.

Ellie Henderson, an economist at Investec, noted that committee patience with the recent inflation rise has worn thin. She warned that if energy prices remain elevated, a temporary price shock risks becoming permanent. The rate decision was widely anticipated by markets, which had priced in the hike following the September data.

The central bank released quarterly economic projections alongside the rate decision. Higher interest rates make borrowing more expensive, which cools spending and inflation but also slows economic growth. These forecasts carry heightened uncertainty because the economic outlook depends heavily on the trajectory of the Iran war.

A sharp fall in energy prices followed heavy losses by the Republican Party in recent U.S. midterm elections. If oil and gas prices continue to decline over the coming weeks, the upcoming peak in inflation may be lower. This could temper expectations for further rate hikes by the Bank of England.

Other major central banks have also raised rates in response to the inflation caused by the Iran war. The U.S. Federal Reserve and the European Central Bank have recently moved in the same direction. Their future interest rate strategies remain largely contingent on what happens to global energy prices.