The Bank of England has held Bank Rate at 3.75% but warned that inflation could climb to slightly above 4% in early 2027 as higher energy prices increase pressure on households and businesses.
The Monetary Policy Committee voted by 6–3 to leave rates unchanged at its September meeting, with three members instead backing an immediate quarter-point increase to 4%.
The Bank said the conflict in the Middle East had contributed to further increases in crude and refined energy prices. UK CPI inflation rose to 3.1% in August and is expected to increase further over the coming quarters.
Inflation could rise above 4%
The Bank's updated short-term projection suggests CPI inflation could reach slightly above 4% in early 2027.
Developments in wholesale oil and gas prices accounted for almost all of the upward change since the Bank's July Monetary Policy Report.
The MPC said risks to inflation were now tilted further to the upside than in July. The Bank's inflation target remains 2%.
Three policymakers wanted rates increased now
Six MPC members — Andrew Bailey, Sarah Breeden, Swati Dhingra, Clare Lombardelli, Dave Ramsden and Alan Taylor — voted to maintain Bank Rate at 3.75%.
Megan Greene, Catherine Mann and Huw Pill voted instead to increase Bank Rate by 0.25 percentage points to 4%.
Mortgage rates already higher
The Bank said financial conditions had tightened further since July and that higher market interest rates were being passed rapidly through to borrowing costs faced by households and businesses.
Quoted two-year fixed mortgage rates were around 95 basis points higher than before the Middle East conflict began, according to the MPC minutes.
Major change to Bank's bond-selling programme
Alongside its interest-rate decision, the MPC unanimously agreed a major change to the way it will unwind the government bonds accumulated through quantitative easing.
The Bank intends to reduce the remaining stock of government bonds held for monetary-policy purposes to zero through a multi-year programme running to the end of 2034.
The plan involves annual gilt sales of £20 billion alongside bonds naturally maturing, producing an average annual reduction of around £46 billion.
The Bank has paused its Asset Purchase Facility gilt auctions while it reviews how the new programme will operate.
Bank considers selling gilts to Government
For £146.5 billion of gilts maturing between 2035 and 2049, the Bank is considering a model under which the bonds would be sold to the Government through the Debt Management Office.
Under that potential arrangement, the Treasury would instruct the DMO to purchase gilts being sold by the Bank at market prices and according to a pre-announced schedule. Those sales would take place at an annualised rate of £20 billion.
The Bank will review the proposal before April 2027. It has not yet made a final decision to use the model.
Bailey says Bank must remain vigilant
Governor Andrew Bailey voted to keep rates unchanged, arguing that domestic inflationary pressures had continued to ease and there was still limited evidence of higher energy prices producing broader second-round inflation effects.
However, he said the risks from energy prices remained on the upside. The MPC said it stood ready to act as necessary to ensure inflation returns sustainably to its 2% target.
The Bank's next scheduled interest-rate decision is due on 5 November.