The Bank of England rate hold was confirmed at its September meeting, with policymakers voting 6–3 to keep the base rate at 3.75% for the sixth time in a row, but the decision came with a sharply raised inflation forecast and a clear warning from Governor Andrew Bailey that a rate rise may be needed if energy prices keep climbing.
The Monetary Policy Committee (MPC) is the nine-member body that sets the UK’s base interest rate, which in turn influences mortgage rates, savings rates and borrowing costs across the economy. Holding the rate means the Bank is neither tightening nor loosening the pressure on households and businesses, it is waiting to see how the picture develops.
Why the Bank of England Rate Hold Was Not the Whole Story
On the surface, Thursday’s decision was entirely expected. Most economists had forecast the MPC would leave rates unchanged, and that is exactly what happened. But the vote split (and the language around it) told a more anxious story.
Three members of the nine-person MPC, Huw Pill, Megan Greene and Catherine Mann, voted to raise rates to 4%, the same three who dissented at the previous meeting. Matt Swannell, chief economic adviser to the Item Club, had predicted precisely this outcome: ‘However, we expect divisions among rate-setters to remain, with July’s three hawks (Huw Pill, Catherine Mann and Megan Greene) again favouring an immediate rate increase.’
Swannell added that, with the rate decision ‘largely seen as a done deal, attention will instead focus on the committee’s communications, particularly on whether the doves have moved towards accepting the possibility of future rate rises.’
According to Finance Calendar, the Bank also paused its active gilt sales alongside the rate hold, gilt sales being one of the tools the Bank uses to withdraw money from the financial system, so pausing them represents a subtle easing of that pressure.
Energy Prices and Inflation: The Pressure Building
UK Consumer Prices Index (CPI) inflation rose to 2.9% in July, up from 2.6% in June and the highest level since March. According to Tekedia, CPI now stands at 3.3% (above the Bank’s 2% target) with the ongoing conflict in the Middle East having disrupted energy supplies and pushed oil and gas prices higher.
Services inflation, which reflects prices in the UK’s dominant industry, offered some comfort: it fell from 3.6% to 3.4%, suggesting limited so-called second-round effects, meaning wage demands and broader shop price increases have not yet spiralled. But the relief may be short-lived. Ofgem’s next energy price cap, kicking in from October, will see household energy bills rise by 4% for a typical dual-fuel household. The UK economy also unexpectedly grew by 0.4% in July, with strength in parts of the services industry, a combination of rising inflation and a growing economy that could push policymakers towards rate rises in the months ahead.
Economists for Pantheon Economics said there is a chance the MPC ‘toughens its language’ at a coming rates decision ‘to open up the possibility of a November hike if energy prices keep ramping up’. They warned: ‘A 4% inflation peak would already be too hot to hold, but further energy price rises could take inflation even higher. The MPC needs to be ready.’
Thomas Pugh, chief economist for RSM UK, agreed, saying the MPC ‘would need to respond’ if inflation accelerates and feeds through into wages and firm pricing. ‘The problem is that the energy shock is becoming harder to look through. Higher energy prices will lift headline inflation over the coming months,’ he said, predicting inflation to peak at almost 4% in 2027.
Governor Bailey was equally direct. Reported by GB News, he stated: ‘The risks are on the upside, the risk particularly being with energy prices,’ and added: ‘We have higher energy prices and they could be higher still.’
Earlier this week, the European Central Bank raised its interest rates for the second time this year, warning that the Iran conflict continues to generate inflationary pressure across the region.
What Comes Next for UK Interest Rates
The next MPC decision is due on 18 June 2026, according to Tekedia, which notes that forward guidance suggests rates could stay steady for much of 2026, though some economists see risks of hikes later if inflation proves persistent, driven largely by energy prices.
For now, the Bank’s position is one of watchful caution. The 6–3 vote, the raised inflation forecast, and Bailey’s public warning about energy prices all point to a committee that is holding its nerve, but not ruling anything out.
