Bank of England holds rates at 3.75% as inflation risks rise

The Bank of England has held Bank Rate at 3.75% but warned that a prolonged period of higher energy prices could require interest rates to rise as it seeks to bring inflation back to its 2% target.

At its September meeting, the Monetary Policy Committee (MPC) voted by a majority of 6–3 to maintain Bank Rate, with three members voting for an immediate 25 basis point increase to 4%. The decision marks the sixth consecutive meeting at which rates have been left unchanged.

The decision comes after UK CPI inflation increased to 3.1% in August, a five-month high, driven in part by higher energy and transport costs. The Bank expects inflation to rise further over the coming quarters as the impact of higher energy prices feeds through to households and businesses.

Protracted conflict in the Middle East has contributed to further increases and volatility in crude and refined energy prices. The Bank said there had so far been little evidence of significant second-round effects on wages and prices but warned that the risk increases the longer energy costs remain elevated.

“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 MPC said economic activity had been slightly stronger than expected, although a softer labour market and higher borrowing costs faced by households and businesses since the Middle East conflict began should help contain inflationary pressures.

Overall, the Committee judged that risks to the inflation outlook were tilted to the upside and had increased since its July Monetary Policy Report.

The decision follows the US Federal Reserve’s move on Wednesday to raise its benchmark interest rate by 25 basis points to 3.75%-4.00%, its first increase in more than three years, amid concerns over persistent inflation.

For UK businesses, the Bank’s decision means borrowing costs remain elevated, while the prospect of a future rate increase adds further uncertainty around financing and investment decisions.

Neil Rudge, Chief Banking Officer at Shawbrook, said: “A hold was widely expected, but no business owner will mistake it for certainty. Inflation is edging back up, energy costs remain volatile, and the debate is shifting from when rates might fall to when rates will rise and by how much.

“For medium-sized businesses, that uncertainty does not stay abstract for long. It quickly becomes a harder call on a new site, a new machine or a new hire. But the answer is rarely to wait for clarity that may not come. Opportunities to acquire, expand capacity or exit do not simply wait for the rate cycle to settle.

“The right response is to plan and structure investment around the uncertainty, rather than sit it out.”