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The Bank of England (BoE) left the Bank Rate unchanged at 3.75% in a 6–3 vote, with policymakers deciding to wait for further evidence on how higher energy prices are feeding through to the economy. However, the three members who voted to raise rates to 4.00%, combined with the Monetary Policy Committee’s (MPC’s) more hawkish tone, reinforce the view that policy could tighten if inflation becomes more persistent.
The MPC highlighted that the conflict in the Middle East has driven further increases in crude oil, refined fuel, and natural gas prices since July, with inflation risks now seen skewed to the upside. While policymakers continue to see limited evidence of meaningful “second-round” effects on wages and prices. However, they warned that the likelihood of such effects could increase the longer elevated energy costs persist. Recent developments are increasingly consistent with the BoE’s previously outlined adverse energy shock scenario, although the outlook remains highly dependent on the evolution of geopolitical tensions.
The UK economy has remained more resilient than expected. The MPC noted activity has been slightly stronger than anticipated and now expects Q3 GDP growth of around 0.4%. However, labour market conditions remain soft, helping to contain domestic inflation pressures. Official data released this week showed CPI inflation rose to 3.1% in August from 2.9% in July, and the BoE expects inflation to rise further over coming quarters as higher energy costs feed through to households and businesses.
The BoE continues to target a sustainable return of inflation to 2% over the medium term. Current projections suggest inflation could exceed 4% in early 2027 before gradually moderating, with the subsequent path dependent on energy prices, wage growth, and inflation expectations. Several MPC members who voted to hold rates indicated that the case for tighter policy would strengthen if upside inflation risks persist.
At the same meeting, the MPC voted unanimously to continue unwinding its balance sheet. The BoE set out a plan to reduce the gilts held for monetary policy purposes to zero through a multi-year quantitative tightening programme, with the remaining portfolio expected to decline at an average pace of £46 billion per year through 2034.
The MPC reiterated that it "stands ready to act as necessary" to ensure inflation returns to target. Market pricing now implies at least one 25bp rate increase by year-end, with investors expecting the Bank Rate to rise toward 4.50% by Q2 2027. Forward guidance remains data dependent, with future policy decisions driven by the persistence of inflationary pressures, wage developments, and geopolitical risks.
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