The Bank of England has increased interest rates for the first time since 2023, as rising energy prices and persistent inflation threaten to put renewed pressure on UK businesses and their finances.
The Bank of England has raised its benchmark interest rate by 0.25 percentage points to 4%, marking its first increase since August 2023, as policymakers respond to mounting inflationary pressures linked to the ongoing Middle East conflict.
The Monetary Policy Committee (MPC) voted eight to one in favour of the increase on 5 November, with the sole dissenter, Catherine Mann, calling for a larger half-percentage-point rise to 4.25%.
The decision comes as the Bank warns that inflation could reach approximately 5% by mid-2027, significantly above its 2% target, with sustained energy price increases threatening to spread through the wider economy.
Jonathan Ashworth, chief economist at the Association of Chartered Certified Accountants (ACCA), said the decision reflected growing concerns about persistent inflation, despite stronger-than-expected economic performance.
“UK growth has proved surprisingly resilient – despite headwinds from the Middle East conflict, while inflation looks set to move above 4% over coming months,” Ashworth said.
“In the absence of a resolution of the Middle East conflict, the risk is for another rate increase in the first quarter of next year.”
Inflation pressures return despite resilient growth
The decision marks a reversal from the Bank’s previous rate-cutting trajectory, highlighting how geopolitical instability is complicating efforts to bring inflation sustainably back to target.
According to the latest Office for National Statistics figures, annual consumer price inflation increased to 3.5% in September, up from 3.1% in August. Transport costs, particularly motor fuels, made the largest upward contribution.
The Bank’s November Monetary Policy Report projects that inflation will peak at around 4.9% in the second quarter of 2027, driven largely by elevated energy costs and their knock-on effects across supply chains.
Oil and gas prices have remained high amid the continuing Middle East conflict, increasing costs for businesses and households alike.
However, economic activity has proved more resilient than previously anticipated. The ONS reported that UK GDP grew by 0.7% in the three months to August 2026, supported by a 0.9% expansion in services output.
This resilience has given policymakers greater scope to tighten monetary policy, although the outlook remains uncertain. The Bank expects annual GDP growth to slow from 1.6% in 2026 to 1.3% in 2027 as higher borrowing costs and inflation weigh on demand.
For businesses already navigating elevated operating costs, the rate increase introduces another financial challenge.
Companies relying on variable-rate borrowing, overdraft facilities or short-term financing could face higher debt-servicing costs, potentially limiting their capacity to invest or expand.
Meanwhile, energy-intensive businesses face the combined impact of rising utility bills and more expensive credit. Those with limited pricing power may struggle to pass additional costs on to customers without affecting demand.
The government’s October 2026 Budget introduced temporary measures to ease energy pressures, including an extension of the electricity VAT reduction and the fuel duty freeze until July 2027.
Nevertheless, the Bank estimates that these measures will reduce inflation by only around 0.25 percentage points in the second quarter of next year.
The latest rate decision therefore creates a difficult balance for businesses attempting to protect profitability while maintaining investment and managing cash flow.
For accounting professionals, the return of monetary tightening places renewed emphasis on financial forecasting, liquidity management and business resilience.
Firms advising SMEs may need to reassess financial projections built around expectations of falling borrowing costs, particularly for businesses approaching refinancing deadlines.
Cash flow forecasts should account for the possibility of further interest rate increases, alongside higher energy expenditure and changes in customer demand.
Accountants should also examine clients’ debt exposure, covenant requirements and working capital arrangements to identify vulnerabilities before additional costs materialise.
For larger organisations, finance teams may need to reconsider investment assumptions and capital allocation decisions as the cost of financing rises.
The Bank’s warning about persistent inflation also creates additional uncertainty around wage negotiations, supplier pricing and longer-term budgeting.
The outlook for monetary policy remains closely tied to developments in the Middle East and whether higher energy prices translate into broader wage and price pressures.
Although several MPC members indicated that further tightening could be necessary, the Bank stressed that future decisions would depend on economic evidence rather than follow a predetermined course.
The next monetary policy announcement is scheduled for 17 December 2026, when policymakers will reassess the inflation outlook and the impact of higher borrowing costs.
Ashworth’s warning of a potential further increase in early 2027 reinforces the need for businesses to prepare for a prolonged period of expensive borrowing.
For accountants and finance leaders, the immediate priority is ensuring financial plans remain resilient under multiple interest rate and inflation scenarios, rather than assuming that the previous trajectory towards lower borrowing costs will resume.
