The Bank of England kept its benchmark Bank Rate unchanged at 3.75% on Thursday. However, policymakers warned that further interest-rate hikes may be needed if higher energy costs continue to push inflation upward.
The decision was widely expected by economists. A weaker UK labor market and elevated market interest rates are already helping tighten financial conditions.
Bank of England Leaves Rates at 3.75%
The Bank of England chose to keep borrowing costs unchanged as it assessed the impact of higher global energy prices on the UK economy.
BoE Governor Andrew Bailey said the recent rise in energy costs has so far had only a limited effect on British wages and consumer prices.
However, the central bank warned that uncertainty remains high.
Ongoing conflict in the Middle East continues to disrupt energy supplies and transportation routes, making the inflation outlook more difficult to predict.
BoE Could Raise Rates in November
Some economists believe the Bank of England is moving closer to another rate increase.
Paul Dales, Chief UK Economist at Capital Economics, said the central bank may struggle to tolerate higher energy prices for much longer.
If energy costs remain elevated and geopolitical tensions continue, he believes the BoE could raise Bank Rate to 4.00% at its next policy meeting in November.
UK Inflation Forecast Rises Above 4%
The Bank of England also raised its inflation outlook.
Policymakers now expect UK consumer price inflation to move above 4% early next year.
That is significantly higher than the central bank’s previous forecast, which projected inflation peaking at around 3.2% in October or November.
The change highlights growing concerns that higher energy prices could feed into broader inflationary pressures.
UK Inflation Hits Five-Month High
UK inflation reached 3.1% in August, its highest level in five months.
However, inflation measures excluding energy remained more stable.
Core inflation, which removes volatile categories such as food and fuel, stayed at 2.6% for a fourth consecutive month.
This suggests that the latest increase in headline inflation has been driven mainly by energy-related pressures.
Bailey Warns Energy Volatility Could Force Rate Hikes
Bailey said the duration of the current energy shock will be important for future monetary policy.
If energy-price volatility continues for longer, the impact on inflation could become more significant.
In that case, the Bank of England may need to raise interest rates to ensure inflation returns toward its 2% target.
BoE Vote Shows Growing Policy Divide
The Monetary Policy Committee voted 6-3 to keep rates unchanged.
The split vote shows that policymakers are becoming increasingly divided over how to respond to rising inflation risks.
Webull UK CEO Nick Saunders said the debate is shifting toward the timing of the next increase rather than whether another hike will happen.
He suggested that a November rate increase is becoming more likely if inflation pressures continue.
However, he also noted that stronger-than-expected UK economic growth and resilience in the services sector could give the Bank of England some flexibility.
Global Central Banks Tighten Policy
The Bank of England’s cautious stance comes as other major central banks also move toward tighter monetary policy.
The US Federal Reserve raised interest rates on Wednesday for the first time since July 2023.
Fed Chair Kevin Warsh emphasized the central bank’s commitment to controlling inflation despite pressure from higher energy costs.
The European Central Bank also increased borrowing costs last week for the second time this year.
ECB policymakers warned that inflation could remain above target for an extended period.
Markets Focus on November BoE Decision
For now, the Bank of England is keeping interest rates steady while monitoring inflation, energy prices and economic growth.
However, the central bank has made it clear that further tightening remains possible.
If energy costs stay high and inflation continues to rise, the November policy meeting could become a key turning point for UK interest rates.
