Key facts
- The Bank of England's monetary policy committee held interest rates at 3.75%.
- Bank of England Governor Andrew Bailey warned that policy may need to tighten if the Middle East conflict persists.
- UK inflation hit 3.1% in August, driven by rising fuel prices.
- The MPC expects inflation to be above 4% in the first quarter of 2027.
- The Bank of England is an outlier among leading central banks in holding rates steady.
- The US Federal Reserve increased borrowing costs for the first time since 2023.
The Bank of England's Monetary Policy Committee (MPC) decided to keep interest rates unchanged at 3.75% at its latest meeting, defying expectations of an immediate hike. However, minutes from the meeting revealed a growing concern among policymakers about the persistent inflation driven by rising global oil prices, a consequence of the ongoing conflict in the Middle East. Governor Andrew Bailey indicated that interest rates may need to be tightened if the conflict continues, suggesting a potential shift from the current hold.
The UK's inflation rate reached 3.1% in August, largely due to increased fuel costs, and the MPC now forecasts inflation to exceed 4% by the first quarter of 2027. Despite a weak jobs market that helps contain inflation risks, the surge in energy prices poses a significant challenge. The Bank's decision to hold rates leaves it as an outlier among major central banks, with the US Federal Reserve having recently raised its rates and the European Central Bank also increasing borrowing costs. The Bank of Japan is also expected to follow suit.
For Mayor Andy Burnham, the prospect of higher interest rates complicates his cost-of-living measures, as increased inflation and borrowing costs could negate the benefits of his initiatives. The new prime minister, focused on domestic affairs, faces the challenge of global geopolitical costs impacting the UK economy regardless of international engagement.