Bank of England holds Bank Rate at 3.75% as inflation rises; hike seen as more likely

The Bank of England left its Bank Rate unchanged at 3.75% on Thursday, despite UK inflation climbing above the 2% target. The Monetary Policy Committee voted 6-3 to hold, while policymakers warned a rate increase is becoming more likely.

Inflation edges up to 3.1%

UK CPI inflation rose to 3.1% in August, according to data released Wednesday. Motor fuel costs were a major driver, up 23% year-on-year, according to the Office for National Statistics.

Governor Andrew Bailey said the Bank of England has seen limited impact from higher global energy costs so far, but warned that persistent volatility could feed into inflation expectations. He added that the longer uncertainty continues, the more likely it becomes that the Bank Rate will need to be raised to return inflation to 2%.

Vote splits 6-3, with dissenters backing a hike

The Monetary Policy Committee held the Bank Rate at 3.75% in a 6-3 vote. The three dissenters voted for a 25 basis point increase to 4%.

Markets had priced in a 76% chance of a hold on Thursday, based on LSEG data. A hike of at least 25 basis points is widely expected at the next meeting in November.

Divergence from other central banks

The decision comes as other major central banks have tightened policy. The U.S. Federal Reserve raised rates by a quarter point on Wednesday, its first hike since 2023. The European Central Bank announced its second rate hike this year after raising rates in June for the first time in three years. The Bank of Japan is expected to raise its key interest rate at the end of its two-day meeting on Friday.

Dissent cites Iran war uncertainty and inflation risks

Catherine L Mann, who voted for a hike, said upside risks to inflation have increased since July. She pointed to energy prices rising above the baseline from the July Report and said the Bank’s short-term inflation forecast projects CPI above 4% in early 2027. Mann argued that raising the Bank Rate is a better risk-management strategy when inflation dynamics are uncertain.

Megan Greene also dissented, citing uncertainty around second-round effects from the Iran war, AI-related supply constraints, and the El Niño climate event.

Huw Pill said raising rates would send a clear signal of the MPC’s commitment to its price stability mandate amid geopolitical conflict and data noise, and argued that acting decisively now can prevent inflation pressures from becoming entrenched.

Bond market reaction and UK borrowing costs

After the decision, gilt yields fell sharply. The benchmark 10-year UK government bond yield dropped 8 basis points to 5.2169%, while 30-year gilt yields shed nearly 12 basis points to 5.7415%.

The article also noted that Britain has the highest borrowing costs in the G7, with yields on its long-dated 20- and 30-year gilts approaching the 6% mark.

Why it matters

With inflation rising to 3.1% and the MPC split on whether to act, the Bank of England’s next move in November is likely to be driven by how quickly energy-related uncertainty feeds into broader pricing and wage pressures, and by how markets reprice UK borrowing costs.