Bank of England Leaves Rates at 3.75%

The Bank of England left interest rates unchanged on Thursday, Sept. 17, 2026, despite inflation rising well above its 2% target, but warned a rate hike was becoming increasingly likely. According to a report by CNBC Economy, the central bank's Monetary Policy Committee voted 6-3 to hold the Bank Rate at 3.75%. The three dissenters voted to enact a hike of 25 basis points to 4%. Markets had been pricing in a 76% chance that the bank would hold interest rates steady, according to LSEG data, but a hike of at least 25 basis points is widely anticipated at its next meeting in November.

The hold marks a divergence from other major central banks. The U.S. Federal Reserve announced a quarter-point hike on Wednesday, its first hike since 2023. Last week, the European Central Bank announced its second rate hike this year, after raising rates in June for the first time in three years. As detailed in coverage of the Bank of England defies Fed’s rate-hike lead, leaving rates unchanged, the U.K. decision runs counter to tightening moves across several jurisdictions. Additional analysis can be found regarding Bank of England Holds at 3.75% a Day After Fed Hike as markets react. The Bank of Japan is expected to raise its key interest rate at the end of its two-day meeting on Friday.

Governor Bailey Warns of Energy Risks

"So far, higher global energy costs have had a limited effect on price and wage setting in the U.K.," Bank of England Governor Andrew Bailey said in a statement Thursday. "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." MPC members who voted to raise rates pointed to uncertainty arising from the Iran war and a need to get ahead of its potential economic ramifications. Catherine L Mann, an MPC member and former global chief economist at Citibank, argued the upside risks to inflation had increased since July, noting that the short-term inflation forecast projected the consumer price index rising above 4% in early 2027. Megan Greene, who also dissented, pointed to uncertainty about the extent of second-round effects of the Iran war, AI-related supply constraints, and the El Niño climate event as sources of inflationary pressure. The third dissenting member, Huw Pill, said raising rates would have sent a clear signal of the MPC's commitment to achieving its price stability mandate.

Data released Wednesday showed that the U.K.'s inflation rate rose to 3.1% in August, its first rise above 3% since March. The country's Office for National Statistics said the spike was largely driven by rising motor fuel costs, which surged 23% year-on-year. As a net energy importer, the U.K. is particularly vulnerable to external energy shocks and is still grappling with a cost-of-living crisis brought on by post-Covid inflation and the Russia-Ukraine war's impact on natural gas supplies. Global inflation concerns, political instability, and apprehension about U.K. fiscal policy have put pressure on British government bonds, known as gilts, this year. Britain has the highest borrowing costs in the G7, with yields on its long-dated 20- and 30-year gilts approaching the 6% mark.

Gilt Yields Fall Sharply After Decision

Gilt yields fell sharply after the decision was announced, with the benchmark 10-year U.K. government bond yield down 8 basis points to 5.2169%, while 30-year gilt yields shed nearly 12 basis points to trade at 5.7415%. Scott Gardner, investment strategist at J.P. Morgan Personal Investing, said in a note after the decision announcement that the bank was biding its time. "Despite headline inflation creeping up over the summer, the labour market continues to soften while closely-watched core and services inflation have both been relatively resilient since the Middle East conflict started," he said. "So far, the UK economy has largely been insulated from the conflict, aside from higher energy bills. However, the longer the war continues, the harder it is to see that resilience holding." Neil Birrell, chief investment officer at Premier Miton, noted that the central bank seemed to be more relaxed on inflation risks than international counterparts while markets continued setting borrowing costs.