Bank of England defies Fed's rate-hike lead, leaving rates unchanged

Primary Journalistic Dispatch & Direct Reporting

The Bank of England left interest rates unchanged on Thursday, despite inflation rising well above its 2% target, but warned a hike was becoming increasingly likely.

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 will hold interest rates steady on Thursday, according to LSEG data, but a hike of at least 25 basis points is widely anticipated at its next meeting in November.

In-Depth Developments & Factual Context

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. The Bank of Japan is expected to raise its key interest rate at the end of its two-day meeting on Friday.

"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."

Industry Impact & Strategic Analysis

But 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, when she also voted in favor of a hike.

"The 'sporadic continuance' of conflict has ratcheted up energy prices well above the baseline from the July Report," she said, noting that the Bank of England's short-term inflation forecast projected the consumer price index rising above 4% in early 2027."

Forward Outlook & Market Perspective

She continued: "Raising [the] Bank Rate is a better risk-management strategy when faced with uncertainty about inflation dynamics and second-round effects. Doing so avoids a worse outcome whereby inflation becomes embedded, which requires even tighter policy later."

Megan Greene, who also dissented from the majority vote, 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 MPC member who voted to tighten monetary policy was Huw Pill, who said raising rates 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."

"Raising Bank Rate would put the MPC in a better place to address risks to price stability as these uncertainties unfold, especially since any resulting second-round effects, once entrenched, are costly to overcome," he said. "Acting decisively now cuts through in a way that bolsters the clarity and effectiveness of policy choices, thereby heading off inflationary pressures rather having to reverse them once they become ingrained."

The Bank of England has not changed rates since December, when it voted for a 25-basis-point cut .

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 (ONS) said the spike was largely driven by rising motor fuel costs, which surged 23% year-on-year.

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