Bank of England Holds at 3.75% a Day After Fed Hike

LONDON: The Bank of England kept Bank Rate at 3.75% on Thursday, Sept. 17, one day after the U.S. Federal Reserve raised rates, but Governor Andrew Bailey warned that a hike was becoming more likely, according to a Sept. 17 report by CNBC.

The Monetary Policy Committee split 6-3. The three dissenters wanted a quarter-point increase to 4%. Markets had priced a 76% chance of a hold, according to LSEG data, and a hike of at least a quarter point is widely expected at the next meeting in November.

Fuel Prices Push Inflation to 3.1%

The decision came a day after official data showed U.K. inflation rose to 3.1% in August, the first reading above 3% since March. The Office for National Statistics said most of the increase came from motor fuel, which cost 23% more than a year earlier. Inflation is now more than a percentage point above the Bank's 2% target.

Bailey said the energy shock had not yet spread far. "So far, higher global energy costs have had a limited effect on price and wage setting in the U.K.," he said. "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."

Mann, Greene and Pill Vote for 4%

The dissenters were Catherine L. Mann, Megan Greene and Huw Pill. Mann said continued conflict had pushed energy prices "well above the baseline from the July Report." She noted the Bank's short-term forecast shows consumer prices rising above 4% in early 2027. Raising rates now, she argued, avoids a worse result later if inflation becomes embedded.

Greene cited the war in Iran, AI-related supply constraints and the El Niño weather pattern as sources of price pressure. Pill said a hike would have sent a "clear signal of the MPC's commitment to achieving its price stability mandate amidst the fog of geopolitical conflict and data noise."

London Breaks From the Fed and ECB

The hold put the Bank out of step with its peers. The Fed announced a quarter-point increase on Wednesday, Sept. 16, its first hike since 2023. The European Central Bank raised rates the previous week for the second time this year, and the Bank of Japan was expected to raise its key rate on Friday.

The Bank of England has not changed rates since December, when it cut by a quarter point.

Gilts Rally on the Hold

Bond investors welcomed the pause. The 10-year gilt yield fell 8 basis points to 5.2169%, and the 30-year yield dropped nearly 12 basis points to 5.7415%. Britain still has the highest borrowing costs in the G7, with long-dated 20- and 30-year yields close to 6% this year.

That matters because the U.K. imports much of its energy and is still dealing with the cost-of-living squeeze that followed post-pandemic inflation and the Russia-Ukraine war's hit to natural gas supplies. Scott Gardner of J.P. Morgan Personal Investing said the Bank was "biding its time," noting that the labor market is softening while core and services inflation have held up. "The longer the war continues, the harder it is to see that resilience holding," he said.

Neil Birrell of Premier Miton said the Bank "seems to be more relaxed on inflation risks than their international counterparts," and warned that gilts could reverse if the expected run of hikes does not arrive.

A week later, the Swiss National Bank also held, at 0%, though with inflation of just 0.8% it faces far less pressure than London. For U.K. borrowers, the practical takeaway is simple. Rates did not rise in September, but three votes for 4% and a forecast of inflation above 4% make November a live meeting.