The Bank of England has increased interest rates by 0.25 percentage points to 4% on Thursday, marking the first rise in more than three years as policymakers respond to inflation driven by escalating oil and energy prices linked to the US-Iran conflict.
All nine members of the Monetary Policy Committee (MPC) supported the increase, with eight voting for the 0.25 percentage-point rise and one member advocating for a larger increase to 4.25%.
Bank of England governor Andrew Bailey indicated the decision “shouldn’t be seen as the first in an inevitably long sequence of hikes”, but warned “unless the conflict in the Middle East is resolved, neither does it seem likely to be the last increase”. Bailey stated that developments in the Middle East would be central to future rate decisions, requiring “real progress towards settling the conflict”.
Inflation pressures mount
The decision follows the Consumer Prices Index (CPI) rising to 3.5% in September, its highest level in 11 months and well above the Bank’s 2% target. The US-Iran conflict has driven up global oil prices, increasing petrol and diesel costs whilst household energy bills face pressure following Ofgem’s 3.6% increase in the energy price cap on 1 October. A further substantial rise has been forecast for January.
The rate increase will immediately affect homeowners with tracker mortgages linked to Bank Rate, whilst borrowers on other variable-rate deals could also face higher monthly repayments. Those on fixed-rate mortgages will avoid immediate increases, though buyers and homeowners approaching new deals face continued uncertainty over borrowing costs.
Housing market impact
The rate rise comes as the housing market shows signs of strain. HMRC figures show residential property transactions fell 1% in September to 94,800, down 4% compared with a year earlier. Zoopla has reported a 15% reduction in purchasing power among mortgage-dependent buyers and expects 100,000 fewer housing transactions in 2026 than last year.
Savills has downgraded its housing market forecasts, predicting UK house prices will fall by 1.5% in 2027. The estate agency expects a sustained recovery to be delayed until the second half of 2028, with average mortgage rates unlikely to fall below 5% before early that year.
The higher borrowing costs add to existing pressures in the property sector, which has already seen revenue challenges from regulatory changes and shifting market dynamics. Meanwhile, rental growth has held at 5% even as void periods lengthen, reflecting broader market adjustments.
Industry response
Nathan Emerson, CEO at Propertymark, said: “As the Bank of England continues to navigate wider economic pressures, including rising inflation, it comes as little surprise that base rate decisions remain focused on maintaining economic stability. While these decisions are never straightforward, the Bank of England must carefully balance the need to control inflation against the wider impact that borrowing costs can have on households.”
Iain McKenzie, CEO of The Guild of Property Professionals, commented: “An increase to 4% is another reminder that the property market cannot operate in isolation from the wider economy. Higher borrowing costs inevitably influence what buyers can afford, and sellers need to recognise that this places limits on achievable prices.”
The prospect of further interest rate increases could place additional pressure on sellers to adjust asking prices to reflect reduced buyer affordability. Future rate decisions will depend on developments in the Middle East and whether inflationary pressures ease sufficiently to prevent further borrowing cost increases.
