Bank of England Keeps Benchmark Interest Rate Steady
"If the conflict in the Middle East persists for an extended period, as appears to be the case, and the risk of second-round effects emerging increases, it is likely that policy may have to tighten," Governor Andrew Bailey said.
The bank's Monetary Policy Committee voted 6–3 to leave the Bank Rate unchanged, a decision that matched market expectations. Megan Greene, Catherine Mann and Huw Pill dissented, pushing for a 25-basis-point increase to 4%.
Annual consumer inflation climbed to 3.1% in August, still running above the bank's 2% target. Using energy prices as of Sept. 14 as a baseline, the bank projects inflation will rise to roughly 3.75% in the fourth quarter of 2026 and edge slightly past 4% in early 2027.
The bank pointed to the drawn-out Middle East conflict as a driver of further increases in crude oil, natural gas and refined product prices, which have darkened the inflation outlook.
Brent crude climbed 36% and UK wholesale gas prices jumped 78% since the period preceding the bank's July report, hitting $106 per barrel and 207 pence per therm, respectively, on Sept. 14.
Bailey said the energy shock's impact on UK prices and wages had so far been limited, but cautioned that sustained volatility would make it "more likely ... we will need to raise Bank Rate."
The three committee members who backed a rate hike argued that the projected inflation peak in early 2027 would land squarely during wage negotiations, heightening the odds that elevated energy costs would trigger second-round effects throughout the economy.
The majority, however, concluded that tight financial conditions and a softening labor market were already exerting enough restraint for the time being.
UK economic output grew 0.4% in the second quarter, and the bank forecast matching growth for the third quarter—well above its earlier projection of 0.1%.
The unemployment rate held at an estimated 4.9% in the three months through July, while underlying private-sector wage growth ran at around 3.5%.
The committee also voted unanimously to approve a plan to fully unwind the government bonds it acquired through its quantitative-easing programs.
The bank will pare down its remaining £368 billion ($491.8 billion) monetary-policy portfolio at an average annual pace of £46 billion, including £20 billion in annual sales, continuing through September 2034.
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