Bank of England Holds Rates, Warns Hike Likely as Inflation Rises

The Bank of England's Monetary Policy Committee (MPC) voted 6-3 to hold the benchmark interest rate at 3.75% on Thursday, marking the sixth consecutive time rates have remained unchanged.

Three MPC members dissented, voting for a 25 basis point hike to 4%. Governor Andrew Bailey warned that interest rates are likely to rise if the Middle East war continues, projecting British inflation to hit 4% early next year. Bailey stated that while higher global energy costs have had a limited effect on price and wage setting in the UK so far, prolonged volatility will increase the impact on inflation.

He criticized the seeming loss of urgency to find solutions to the war in Iran. Oil prices are currently above $100 a barrel, and analysts expect average gas and electricity bills to exceed £2,000 this winter. The Bank of England's short-term inflation forecast projects the consumer price index rising above 4% in early 2027 from the current 3.1%.

This decision places the Bank of England out of step with other major central banks. The US Federal Reserve announced a quarter-point hike on Wednesday, its first since 2023. The European Central Bank announced its second rate hike this year, following a June increase that was its first in three years. The Bank of Japan is expected to raise its key interest rate on Friday.

Markets are now pricing in a high probability of a Bank of England rate hike at its next meeting in November, with potentially three more 0.25 percentage point increases next year. Average five-year fixed mortgage deals have risen to 5.87%, the highest level since November 2023, up from 4.95% before the Iran war. The MPC also partly suspended quantitative tightening, the process of unwinding assets. Yields on gilts, the main way the government borrows, fell to monthly lows after the announcement.