LONDON, U.K.: The Bank of England raised interest rates to 4 percent on November 5, its first increase in more than three years, warning that further tightening could be necessary as the US-Iran conflict continues to drive up energy costs and threaten Britain's inflation outlook.

The central bank's Monetary Policy Committee voted 8-1 to increase its benchmark rate by a quarter percentage point from 3.75 percent. The lone dissenter, Catherine Mann, supported a larger half-point increase to 4.25 percent.

The decision comes as the bank forecasts inflation will reach approximately 5 percent by the middle of next year, more than twice its 2 percent target, creating further cost-of-living challenges for Prime Minister Andy Burnham's government.

"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," Governor Andrew Bailey said.

Although the bank has seen limited evidence of accelerating inflation outside sectors directly affected by higher energy costs, policymakers concluded that months of elevated prices had created sufficient future inflationary pressure to justify immediate action.

Consumer price inflation reached 3.5 percent in September, raising concerns among some policymakers that inflation expectations could become harder to control.

Mann, who had previously criticised the bank for being too slow to reassure markets about inflation, cited "non-linear inflation risks" and warned of a possible loss of confidence in the central bank.

Financial markets had widely anticipated Thursday's increase and were pricing in three further quarter-point hikes during 2027, more than most economists expect.

Bailey said the difference reflected financial markets accounting for the possibility of a sharper rise in energy prices, while economists generally based their forecasts on a more moderate tightening cycle.

"Without news which softens the risks to inflationary pressures, I can see the argument for a further increase in rates," he said in the policy minutes.

Deputy Governor Clare Lombardelli also indicated that another increase would probably be needed in the near term.

External policymaker Megan Greene called for "further tightening", while Chief Economist Huw Pill referred to the need for "additional hikes".

However, policymakers Swati Dhingra and Alan Taylor said they would require stronger evidence of secondary inflationary effects before supporting additional increases.

Alongside the rate decision, the Bank of England upgraded its economic growth forecasts for this year and next to 1.6 percent and 1.3 percent, respectively, exceeding projections issued by the government's Office for Budget Responsibility last week.

The bank attributed some of the stronger outlook to investment in artificial intelligence and a modest temporary boost from Finance Minister John Healey's annual budget.

However, the inflation outlook deteriorated significantly.

Under its central forecast, inflation is expected to peak at an average of 4.8 percent in the second quarter of 2027. In a more adverse scenario, with oil prices reaching approximately $130 a barrel instead of around $100, inflation could climb to 6.2 percent in the third quarter of 2027.

The bank now expects inflation to return to its 2 percent target only in the third quarter of 2028, six months later than it projected in July.

It also forecast that British households' income from work, after accounting for inflation and taxes, would decline both this year and next.

The government's latest budget is expected to reduce inflation by 0.25 percentage points at its peak, although the bank warned that inflation could rise again when temporary cost-of-living support measures expire.