London: The Bank of England raised its benchmark interest rate to four percent on Thursday, the first increase in more than three years, as soaring energy costs push up global inflation.
The BoE warned UK inflation risked hitting 6.2 percent in the third quarter of next year from 3.5 percent currently, in a worst case scenario of oil prices soaring far beyond $100 a barrel because of the Middle East conflict.
At the same time, the central bank upgraded its economic growth forecasts for this year and next, driven by "strength in business investment" which "partly reflects strength in AI-related demand", it said in a statement.
The central bank tightened borrowing costs by a quarter point, catching up with the US Federal Reserve and the European Central Bank in lifting rates since the start of the Middle East conflict.
Along with Ukraine's strikes on Russian refineries, disruptions to Gulf energy supplies owing to the US-Iran war have caused record-high diesel prices around the world.
"There is now enough inflationary pressure in the pipeline caused by the rise in energy prices, that an increase in Bank Rate is warranted," BoE governor Andrew Bailey said Thursday.
"Today's increase shouldn't be seen as the first in an inevitable long sequence of hikes. But, unless the conflict in the Middle East is resolved, neither does it seem likely to be the last increase," he added.
The BoE estimated UK gross domestic product to hit 1.6 percent this year and 1.3 percent next year.
In July, it had forecast GDP output of 1.1 percent in both years, while its expectation for UK growth to slow next year mirrored recent forecasts from the country's government and International Monetary Fund.
The BoE last raised its key interest rate in August 2023, and has kept the cost of borrowing at 3.75 percent since December.
"Ultimately, how high interest rates rise and how long they stay high depends on what happens to energy prices and the domestic economy, as they will largely determine the extent of the second-round inflation effects," Paul Dales, chief UK economist at Capital Economics research group, said Thursday.
The BoE added that its central forecast is for UK inflation peaking at 4.9 in the second quarter of next year.
Millions of Britons face a jump in energy bills from the start of 2027, even after the Labour government offered some assistance in its annual budget announcement last week.
