Families are facing Christmas mortgage misery after the Bank of England hiked interest rates today – and warned the cost-of-living crisis is set to get worse.
The Bank's Monetary Policy Committee raised the base rate by 0.25 percentage points to 4 per cent. It is the first rise since August 2023.
Eight members backed the increase – while one wanted to go further with a half-point bump.
In a grim assessment, the Bank cautioned that inflation could hit 5 per cent next year, with more rate rises on the cards unless the Iran war ends. Analysts said there is a 'real' chance of another boost as soon as next month.
For many homeowners the move will effectively wipe out the cost-of-living help announced by Labour in the Budget last week. Those on typical tracker mortgages could see monthly payments rise £31, and variable deals could go up around £14.
The increase was expected despite markets betting that the US midterms battering for Donald Trump could ease the Middle East crisis.
That has been the biggest factor driving up inflation, but Brent Crude has tumbled to around $95 from $115 before the elections.
For many homeowners the move will effectively wipe out the cost of living help announced by Labour in the Budget last week
Bank Governor Andrew Bailey said: 'There is now enough inflationary pressure in the pipeline caused by the rise in energy prices, that an increase in Bank rate is warranted.
'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.'
Mr Bailey said the latest fall in oil prices was 'positive news', but warned there is a 'significant amount' of inflationary pressure already in the system even if the crisis resolves immediately.
He added that should energy costs remain lower inflation would peak 'somewhat below 5 per cent'.
The Governor rejected the idea that the Bank would not have imposed the hike if it had known about the oil price fall.
'If we do see a continuation... then that will shape the path down. It will come down faster and on a steeper slope,' he added.
The MPC said many companies had so far been absorbing higher energy costs into their profit margins or had hedged against large spikes since the war began around nine months ago.
But it warned that such 'buffers would only prove temporary and these cost pressures would eventually pass through into higher consumer prices if the energy shock persisted'.
This means that households could face price rises in shops for things like food, drink and other goods and services.
Pressure on the MPC to take action has grown since official figures showed headline Consumer Price Index inflation rate rose to 3.5 per cent in September, an 11-month high. The Bank's target is 2 per cent.
Inflation is expected to gather pace this winter after Ofgem's energy price cap rose by 3.6 per cent for a typical household on October 1. It had been set to jump again by 22 per cent in January.
Other central banks have already increased their interest rates, including the US Federal Reserve which did so last month for the first time in three years.
The MPC was also taking into account other economic indicators including that the UK's unemployment rate fell to the lowest level in more than a year in the three months to August, to 4.7 per cent.
The economy unexpectedly grew in August, by 0.1 per cent, suggesting resilience in the UK despite pressure on consumer spending and wider volatility because of the Iran war.
Bank of England Governor Andrew Bailey, who has been in the position since 2020
Chancellor John Healey said: 'The Iran conflict is reaching deep into the pockets of families and businesses here at home.
'In my Budget I acted to give some breathing space to families and businesses. Twenty million households will get a £100 energy payment, I extended the tax cut on electricity bills and froze fuel duty.
'I also set out the course ahead to get costs down for good. That includes big changes to our energy system so Britain is better protected from global shocks in the future.'
Shadow chancellor Andrew Griffith said: 'Rising interest rates are another headwind for hardworking families to deal with.
'They mean higher mortgage costs, and with the independent OBR confirming that living standards will fall next year, it's time Labour cut taxes, welfare spending and costly regulations to make life cheaper for families.'
Nigel Green, boss of financial advisory giant deVere Group, said another rate rise before Christmas is a 'real' possibility.
'Most forecasters see December as a pause. I think they're underestimating how uncomfortable the Bank is with where inflation is heading,' he said.
'Today's move looks to me like the start of something, and I believe a second rise at the December 17 meeting is more likely than many expect.
'Inflation is still climbing. Fuel costs have jumped because of the conflict in the Middle East, the energy price cap is set to rise again this winter, and the Bank's own projections have inflation pushing above 4 per cent early next year.'