- The Bank of England voted 6–3 to keep Bank Rate at 3.75 per cent.
- UK inflation rose to 3.1 per cent in August, driven partly by higher energy costs linked to the Middle East conflict.
- Governor Andrew Bailey warned that rates could rise if elevated energy prices begin feeding more strongly into wages and other prices.
The Bank of England has chosen to wait rather than raise interest rates, even as inflation moves further away from its 2 per cent target.
The Monetary Policy Committee voted by six to three on Thursday (17) to leave Bank Rate at 3.75 per cent. Three policymakers wanted a quarter-point increase to 4 per cent, revealing a sharper divide over how the central bank should respond to the latest inflation pressures.
The decision came a day after official figures showed UK inflation had risen to 3.1 per cent in August, up from 2.9 per cent in July.
So why hold rates when inflation is moving in the wrong direction?
The answer lies partly in what is driving prices higher.
Energy prices have risen sharply as the conflict in the Middle East has disrupted global markets. Brent crude has moved above $100 a barrel, adding to concerns that fuel and energy costs could push inflation higher in the months ahead.
The Bank said inflation is “likely to rise further over coming quarters”, with crude and refined energy prices remaining more volatile and higher than before the conflict.
Yet policymakers are not seeing strong evidence that the energy shock has already spread into wages and broader price-setting.
“There has been little evidence so far of material second-round effects in price and wage-setting,” the committee said.
That distinction is important.
Why the Bank is waiting
Interest rates can influence demand in the economy, but they cannot directly bring down the price of oil caused by a geopolitical conflict.
Raising Bank Rate could therefore make mortgages, loans and business borrowing more expensive without immediately addressing the original cause of the inflation spike.
At the same time, the Bank does not want a temporary energy shock to become a more permanent inflation problem.
Governor Andrew Bailey said the longer higher energy prices persist, the greater the impact could be on inflation.
“Today, we’ve held Bank Rate at 3.75 per cent,” Bailey said. “So far higher global energy costs have had a limited effect on price and wage setting in the UK.”
But he added that if the volatility continues, “we will need to raise Bank Rate to ensure that inflation falls back to our 2 per cent target”.
That leaves the Bank in a difficult position. Move too quickly and it risks adding pressure to an already fragile economy. Wait too long and higher energy costs could become embedded in wages and prices.
The committee said the risks to its inflation outlook are now “tilted to the upside”, more so than when it published its July Monetary Policy Report.
What could happen to mortgages?
For households, the immediate message is that Bank Rate has not increased. But the 6–3 split means the possibility of a hike has returned to the conversation.
The prospect of higher rates has already affected parts of the mortgage market, with some major lenders raising borrowing costs.
The average five-year mortgage rate has reached 5.87 per cent, its highest level since November 2023, according to figures cited in reports.
That matters for homeowners coming off fixed-rate deals and for buyers trying to enter the housing market.
Higher rates can also raise the cost of personal loans and business borrowing, potentially putting further pressure on households and companies.
There is another complication: inflation caused by higher energy prices can squeeze household incomes at the same time as higher interest rates increase borrowing costs.
Economists at ING said the UK economy is less susceptible to the kind of second-round inflation effects seen during the energy shock following Russia’s invasion of Ukraine.
The Bank is therefore taking a “wait and see” approach, watching whether higher energy prices begin to influence wage demands and the prices businesses charge.
The outlook could change quickly if the Middle East conflict keeps energy markets under pressure.
The Bank also has to consider the wider economy. Higher interest rates can reduce spending and investment at a time when UK growth remains delicate.
That makes this decision less about whether inflation is too high — it clearly remains above the Bank’s 2 per cent target — and more about how persistent the current inflation shock will be and whether monetary policy can actually address its source.
For now, the Bank has chosen to wait.
But with three policymakers already calling for a hike and the Governor warning that another increase may become necessary, 3.75 per cent may not be the final stop if the energy shock continues to spread through the UK economy.
