Interest rates have risen for the first time in more than three years and the Bank of England has signalled a further increase is likely unless the US-Iran war is resolved.

Rates rose to 4% from 3.75% in a bid to curb inflation mainly driven by the conflict’s impact on global oil prices.

Andrew Bailey, the Bank’s governor, said the decision “shouldn’t be seen as the first in an inevitable 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”.

The higher level will increase the cost of borrowing for things such as mortgages, loans and credit cards, but will also lead to higher returns on savings.

The Bank’s rate-setting committee all backed increasing interest rates, with eight out of nine voting in favour of the rise to 4%. One member wanted an even bigger increase to 4.25%.

Bailey said the hike was warranted due to higher energy prices and pointed to what happens in the Middle East as the main factor in future decisions.

“Put simply, it requires real progress towards settling the conflict in the Middle East,” the governor said.

Bailey said he could “see the argument” for a further rate hike, before taking a “more conditional approach” dependent on the path of energy prices and inflation in the coming months.

However, the views of members on the rate-setting committee differed on the path forward.

Clare Lombardelli agreed there was “likely to be a case for a further increase in rates in the near term”, while Megan Greene went further, suggesting “additional hikes” might be likely depending on how inflation impacted wages, prices and the jobs market.

However, Alan Taylor said the rate rise was a “a risk-management ‘one-for-now’ insurance hike”.

Inflation, which measures the pace of price rises over time, is well below its peak of a few years ago but remains above the Bank of England’s 2% target and is expected to increase further next year.

Prices rose 3.5% in the year to September 2026, largely due to higher fuel prices. Millions of households are also set to be hit by energy bill increases in January.

Higher fuel prices can lead to prices rising for a host of goods and staples as businesses pass on higher costs to customers.

But the Bank said there was “limited evidence” this had happened so far for goods, such as food, with some firms absorbing cost increases and accepting lower margins.

In an interview with the BBC, Bailey defended the decision to raise rates despite the Bank’s assessment that inflation was yet to spread to other parts of the economy.

He said further increases in energy prices are putting upward pressure on inflation and “that’s what we have to seek to lean against”.

Patrick Bryson, from Brighton, is set to see his five-year mortgage term with a 3.51% interest rate end soon.

The best deal the 51-year-old can find is a 5.17% loan with HSBC, which means his repayments will jump from £1,420 to £1,680 a month from February.

“The only thing that bugs me about the mortgage is that after five years of paying it off we are now paying more than we were before,” said the father-of-three. “That’s a bit of a slap in the face.”

The guitar teacher, who has a combined income of around £68,000 a year with his wife, who manages a care home, said the couple is feeling pressure on their finances and so have changed their shopping habits and are looking to reduce their subcription outgoings.

“Over the last year I have stopped buying wine, we don’t go out to eat much anymore, we have knocked takeaways on the head. The prices are ridiculous,” he said.

The Bank now expects inflation to peak at 4.9% in the middle of next year, higher than it originally estimated, and not return to 2% until 2028.

But in an “adverse scenario”, where the US-Iran war could escalate further and send oil prices higher, inflation could reach 6.2% in 2027, it suggested.

While the UK cannot control global energy prices, the Bank raised rates, for the first time since August 2023, in order to limit the knock-on effects of high energy prices resulting in inflation going up across the board.

Its base rate is what it charges other banks and building societies to borrow money, which influences what customers for mortgages, loans, credit cards get charged, as well as savings rates.

The rate rise will see 510,000 tracker mortgage-holders see a £31 monthly jump in repayments, according to banking trade body UK Finance.

Homeowners on fixed deals will see no change, though future products may be affected.

However, people on variable deals will be impacted depending on how their lender reacts to the rate rise. Typically a 0.25pp rise means a £14 increase per month in repayments.