The Bank of England rate hold at 3.75% was confirmed for the sixth consecutive time on Thursday, but policymakers made clear the decision could soon go the other way if the conflict involving Iran continues to push global energy prices higher.
The Bank’s Monetary Policy Committee (MPC), the nine-person body that sets UK borrowing costs, voted six to three to keep rates unchanged. The three dissenting members called for an immediate rise to 4%.
What the Bank of England Rate Hold Means for Households
Governor Andrew Bailey, who voted with the majority to hold, pointed to what economists call “second-round effects”, the risk that rising energy costs prompt workers to demand higher wages and businesses to push up shop prices in response. “So far higher global energy costs have had a limited effect on price and wage setting in the UK,” he said. He then went further: “But the longer this volatility persists, the bigger the impact it will have on inflation, and the more likely it is we will need to raise Bank rate to ensure that inflation falls back to our 2% target.”
The Consumer Prices Index (CPI) (the official measure of inflation) rose to 3.1% last month, up from 2.9% in July and a five-month high. Petrol and diesel prices have been the main driver, reaching multi-year highs. From next month, households will also face another increase in gas and electricity bills when Ofgem’s new price cap comes into effect. The Government has already announced it is scrapping VAT from energy bills between October and March to provide, in its words, “breathing space” for households.
The MPC’s revised forecasts illustrate how much the energy situation has changed its thinking. It now expects CPI to rise to about 3.75% by the end of 2026 and to peak at about 4% by the start of 2027. That is a sharp revision upward from its previous projection of about 3.2% by the end of the year, a figure the House of Commons Library records as the MPC’s central forecast going into this meeting. The committee identified the conflict in the Middle East and its effect on energy prices as “the dominant source of uncertainty for the inflation outlook”.
For context, the Bank had spent much of the previous period moving in the opposite direction. According to the House of Commons Library, interest rates were cut by 1.5 percentage points in total from August 2024 to December 2025 as inflation appeared to be falling back toward the 2% target. The current pressures have reversed that picture: CPI was 2.6% in June 2026, already above target, and the MPC now expects it to climb considerably further.
Suren Thiru, of the Institute of Chartered Accountants in England and Wales, said the Bank had left the “door wide open” to a November rate rise. “Interest rates are at a critical cliff-edge moment,” he said. “While policy could still remain on hold this year, persistent US-Iran hostilities mean the risk of a rate hike has shifted from a possibility to a probability.” October will also be when Chancellor John Healey delivers his first autumn Budget, which he may use to introduce further cost-of-living measures.
The Quantitative Tightening Shake-Up
Alongside the rate decision, the Bank announced a significant change to its government bond-selling programme, known as quantitative tightening (QT). Quantitative tightening is the process of unwinding the large stock of government bonds, called gilts, that the Bank built up during years of economic stimulus. Rather than selling all those gilts into the open financial markets, the Bank is now asking Chancellor Healey to approve a method of returning a portion of them directly to the Government instead.
That change means the Bank’s current gilt auctions are being paused until the new arrangement is agreed. According to Trading Economics, the MPC unanimously agreed to reduce its stock of government bond purchases to zero through a multi-year programme, unwinding holdings at an average annual pace of £46 billion through 2034. Within that, average annual sales to the market will run at £20 billion. A portion of the gilts will be set aside to back the issuance of bank notes rather than being sold at all.
Mr Bailey said the announcement had “provided clarity over the future” of the QT programme. Markets appeared to welcome that clarity: the yield on 30-year gilts, a measure of the Government’s borrowing costs that had been climbing to fresh highs in recent weeks, fell to about 5.72% on Thursday, its lowest level in more than a month. With the next MPC meeting due in November, all eyes are now on whether the energy price picture shifts enough in the coming weeks to tip the committee’s split vote the other way.
