Bank of England poised to hold rates as inflation pressures mount

The Bank of England's Monetary Policy Committee is set to announce its interest rate decision on Thursday at noon, and the expectation among most economists is that it will leave the benchmark rate where it sits: 3.75%, unchanged for the sixth meeting in a row. But the backdrop against which this decision arrives has shifted considerably. Inflation, which the Bank aims to keep at 2%, has climbed to 3.1% as of August—the highest it has been in half a year—and the culprit is unmistakable: the prolonged conflict in the Middle East has sent global energy prices climbing, which in turn has pushed up the cost of petrol, diesel, and airfares for British consumers.

The nine members of the committee have been watching this unfold with evident concern. Back in July, after the previous rate decision, Bank of England governor Andrew Bailey signaled that if the conflict continued and oil prices stayed above $100 a barrel, the Bank would likely have to raise rates. That threshold has been crossed. Oil moved above $100 per barrel on September 9 and has remained there since, with no meaningful signs of a lasting ceasefire. Bailey's warning, made weeks ago, now reads as a conditional promise the Bank may soon need to keep.

What makes this moment particularly fraught is that the Bank of England is not acting in isolation. The European Central Bank recently raised its rates to 2.5%, citing the Middle East conflict and warning that inflation would remain "well above" its target for some time. The US Federal Reserve, on the same day this inflation data was released, raised its own rate to 3.5%-3.75% for similar reasons. The global consensus is tightening, and the pressure on the Bank to follow suit is mounting. Yet analysts remain divided on whether a rate rise will actually come before the end of the year, or whether the committee will hold steady a while longer.

The human cost of this uncertainty is already visible in the mortgage market. Lenders, anticipating that rates will eventually rise, have begun repricing their products upward. The average two-year fixed residential mortgage rate now stands at 5.77%—its highest point since May. The five-year fixed rate has climbed to 5.83%, the highest since November 2023. Andrew Montlake, chief executive of mortgage broker Coreco, put it plainly: the inflation problem has not been solved. "If inflation proves sticky, lenders' funding costs stay under pressure, which makes cheaper mortgages harder to deliver," he said. His advice to borrowers approaching the end of a fixed-rate term was direct—start looking early, lock in an option, and keep reviewing it.

The Bank's dilemma is real. Raising rates would help bring inflation down by making borrowing more expensive and saving more attractive, which typically dampens spending and prices. But it would also put pressure on employers and make it harder for people looking for work to find jobs. Households already feel the squeeze from higher borrowing costs, though savers do benefit from more generous returns on their money. Yet those returns, as Harriet Guevara of Nottingham Building Society noted, can be eroded by the rising cost of living itself. The advice to savers was measured: check regularly that your savings are earning a competitive return, and think carefully about the balance between money you need quick access to and money you can afford to lock away longer.

Economists expect that the higher global energy costs will eventually feed through to food and fuel prices more broadly, meaning the inflation rate has not yet peaked. The Bank will be acutely aware of this when it makes its announcement. The decision to hold rates steady on Thursday may be the last time it can do so without acting.