BoE Hikes to 4% as Inflation Forecast Nears 5%, but MPC Divides Over What Comes Next

BoE raised Bank Rate by 25bps from 3.75% to 4.00% at its November meeting, as the prolonged Middle East energy shock pushed the inflation outlook significantly higher. The Monetary Policy Committee voted 8–1 for the increase, with Catherine Mann dissenting in favour of a larger 50bps hike to 4.25%. The Bank now expects CPI inflation, which stood at 3.5% in September, to reach around 5% by mid-2027, reflecting further increases in global energy prices and the growing risk that elevated costs will spread into wages and broader consumer prices. However, policymakers stressed that future decisions would depend on incoming evidence, reiterating that “monetary policy is not on a pre-set path.”

The November Monetary Policy Report revealed a substantial deterioration in the inflation outlook. The central forecast for CPI inflation in 2027 Q4 was raised from 2.1% to 4.0%, while the projection for 2026 Q4 increased from 3.2% to 3.8%. Inflation is expected to peak at approximately 4.9% in 2027 Q2 before gradually declining toward the 2% target in 2028. The revisions were driven primarily by higher energy prices, with the Bank assuming that some of those costs would increasingly feed through into other goods, services and wages. The central projection now incorporates larger second-round effects than in July, adding a little over half a percentage point to inflation on average during the second half of the forecast period. Nevertheless, the MPC acknowledged that there was still limited evidence of significant second-round effects in current wage and price-setting data. Firms have so far absorbed some higher costs through narrower margins, hedging arrangements and fixed-price energy contracts, although those buffers may prove temporary. The Bank judged that the scale and persistence of the energy shock had increased the risk of broader inflation pressures sufficiently to justify tightening before those effects became firmly established.

The case for higher rates was also reinforced by stronger-than-expected economic activity, although the growth outlook has become increasingly uneven. BoE upgraded its four-quarter GDP growth forecast for 2026 Q4 from 1.2% to 2.2%, supported by resilient business-to-business services, investment and AI-related activity. Recent labour market indicators also suggested that spare capacity had stopped increasing. However, the Bank lowered its 2027 Q4 growth projection from 1.4% to 1.0%, expecting higher energy bills, declining real household incomes, tighter borrowing conditions and fiscal consolidation to weigh more heavily on demand. Unemployment is projected to rise gradually from 4.8% in 2026 Q4 to 5.0% in 2027 Q4 and 5.1% in 2028 Q4. This combination of firmer current activity and weaker future growth complicates the inflation outlook: stronger demand may allow businesses to pass on higher costs, while a sharper slowdown could instead constrain pricing power and limit persistent inflation.

The vote also revealed important differences within the MPC over the appropriate next steps. Governor Andrew Bailey supported the 25bps increase, arguing that the latest inflation developments justified action and that, absent news reducing inflation risks, there could be a case for a further hike before adopting a more conditional approach. Huw Pill similarly warned that “a single 25-basis point hike is unlikely to be sufficient,” while Megan Greene and Clare Lombardelli also indicated that additional tightening was likely to be needed. Mann preferred a more forceful response, arguing that a 50bps increase was necessary from a “risk management and credibility perspective” to prevent persistent inflation dynamics becoming embedded. However, Alan Taylor offered a different interpretation, describing the decision as a “one-for-now” insurance hike and explicitly warning that “this is not the start of a hiking cycle.” He emphasized that the next move could be higher, lower or unchanged, depending on the evolution of energy prices and domestic inflation pressures.

The MPR’s alternative scenarios illustrate why the Committee has avoided committing to a fixed tightening path. Under the central projection, conditioned on market-implied interest rates, CPI inflation falls to 2.0% by 2028 Q4. However, an adverse scenario involving persistently higher energy prices and stronger wage-price responses leaves inflation at 5.5% in 2027 Q4 and 3.0% in 2028 Q4, requiring a more restrictive policy stance. Conversely, a sharper demand slowdown could prevent second-round effects from emerging, pushing inflation down to 1.2% by 2028 Q4 and reducing the need for further tightening. These scenarios are illustrative rather than forecasts of future Bank Rate decisions. An additional uncertainty is that the MPR’s energy assumptions were based on futures prices averaged through October 27, before this week’s sharp fall in Brent crude toward $95. A sustained decline in energy prices could ease the projected inflation pressure, although a temporary selloff would not necessarily alter the medium-term outlook. Overall, BoE’s November decision signals a stronger response to inflation risks, but the extent of further tightening will depend on whether the energy shock generates persistent wage and price pressures or instead undermines demand sufficiently to contain them.

Data Summary

BoE Monetary Policy Decision — November 2026

Eight MPC members supported a 25bps increase. Catherine Mann preferred a larger 50bps hike. The Committee emphasized that future policy decisions are not on a predetermined path.

Central CPI Inflation Forecasts

Four-quarter inflation rate, Q4 of each year.

The largest revision is for 2027 Q4, with projected inflation raised by 1.9 percentage points.

Central GDP Growth Forecasts

Four-quarter GDP growth, Q4 of each year.

Unemployment Rate Forecasts

Inflation and Growth Scenarios –

All scenarios are conditioned on the same market-implied interest-rate path.

The scenarios illustrate different economic outcomes under a common market-rate assumption. They are not commitments to future Bank Rate decisions.

Key Takeaways

• BoE raised Bank Rate to 4.00% by an 8–1 vote: Eight members supported a 25bps increase, while Catherine Mann preferred a larger 50bps hike to 4.25%, citing inflation persistence and policy credibility risks.
• Inflation forecasts deteriorated significantly: The central projection for CPI inflation in 2027 Q4 was raised from 2.1% to 4.0%, with inflation expected to peak around 4.9% in 2027 Q2 before gradually returning toward target.
• The energy shock remains the main inflation driver: Persistent increases in global oil and gas prices have raised expected household energy bills and business costs, increasing the risk that inflation spreads beyond energy.
• Second-round effects remain a risk rather than an established development: The MPC acknowledged limited evidence of substantial wage-price spillovers so far. However, prolonged energy pressures, expiring hedges and resilient demand have increased concerns about future inflation persistence.
• Stronger current growth contrasts with a weaker 2027 outlook: BoE upgraded its 2026 Q4 GDP growth forecast from 1.2% to 2.2%, but lowered the 2027 Q4 projection from 1.4% to 1.0%, anticipating a growing drag from energy costs, tighter financial conditions and fiscal consolidation.
• The labour market has stabilized, but spare capacity persists: Recent activity and employment indicators were stronger than anticipated, reducing confidence that weak demand alone would contain inflation. Unemployment is nevertheless projected to rise gradually in the coming years.
• MPC members differ over further tightening: Bailey, Pill, Greene and Lombardelli indicated that additional rate increases could be warranted. However, Alan Taylor characterized the decision as a “one-for-now” insurance hike and warned against assuming the start of a predetermined tightening cycle.
• Alternative scenarios underline considerable uncertainty: In the adverse inflation scenario, CPI remains at 5.5% in 2027 Q4. Under weaker demand, inflation falls below target in 2028, illustrating how the appropriate policy stance depends on the interaction between energy prices, wages and economic activity.
• The MPR’s energy assumptions predate the latest oil selloff: Forecasts were conditioned on energy futures averaged through October 27, before Brent’s sharp decline toward $95. A sustained fall could ease inflation pressure, but a temporary decline would not necessarily alter the medium-term outlook.
• Future policy remains conditional: BoE is responding to a worsening inflation outlook, but the extent of additional tightening will depend on whether higher energy costs generate persistent wage and price pressures or instead weaken demand sufficiently to contain inflation.

Ful BoE statement and MPR.