BoE Holds Rates at 3.75% as Inflation Risks Shift Higher

• The Bank of England (BoE) held its policy rate at 3.75% on September 17, 2026, but warned that borrowing costs may need to rise if the conflict in the Middle East persists. The Monetary Policy Committee voted 6–3 to maintain rates, with three members supporting a 25 basis-point increase to 4.0%.
• Although the decision to hold was widely expected, the meeting marked a clear shift in tone towards tighter policy, positioning the BoE to potentially follow the European Central Bank (ECB) and US Federal Reserve (Fed) in raising borrowing costs.
• According to the BoE, inflation risks have shifted further to the upside as higher global energy prices continue to feed through the economy. Governor Andrew Bailey warned that the longer energy-price volatility persists, the greater its impact on inflation and the likelihood that the bank may need to raise rates to return inflation to its 2% target.
• The central bank now expects inflation to rise to slightly above 4% in early 2027, compared with its previous forecast for a peak of 3.2% in late 2026. UK inflation stood at 3.1% in August, with the higher outlook largely reflecting increased energy costs associated with the prolonged Middle East conflict.
• So far, higher global energy costs have had a limited effect on UK price and wage setting. However, the BoE warned that the longer the volatility persists, the greater the risk that inflation becomes more entrenched, even as underlying wage and business-pricing pressures remain relatively contained.
• The BoE also raised its estimate for Q3 2026 economic growth to 0.4%, from 0.1% previously. Separately, the bank announced changes to its gilt-unwinding programme, including a pause in active bond sales as it seeks to reduce pressure on the UK government bond market.
• The decision represents a hawkish hold, with the BoE leaving rates unchanged while signalling greater concern about persistent energy-driven inflation. Although second-round effects on wages and business pricing remain limited, a prolonged Middle East conflict could increase the risk of inflation becoming more entrenched and strengthen the case for a future rate hike.

(Source: Reuters)