The Bank of England has held Bank Rate at 3.75% by a 6–3 vote, despite a significant deterioration in its near-term inflation outlook. Three members of the Monetary Policy Committee — Megan Greene, Catherine Mann and Huw Pill — voted instead for an immediate 25-basis-point increase to 4%, while the majority judged that existing monetary restraint and limited evidence of broader inflation propagation still justified waiting.
The distinction between the initial energy shock and wider domestic inflation is becoming increasingly important. UK CPI has risen to 3.1%, but the Bank estimates that around 0.7 percentage points of the 1.1-point overshoot of its 2% target is directly attributable to energy prices, predominantly motor fuels. Finance Gazette calculates that this represents almost 64% of the current inflation overshoot. At the same time, core inflation has remained at 2.6%, services inflation is lower than in June and businesses’ year-ahead CPI expectations have declined on the Bank’s Decision Maker Panel measure.
The Bank nevertheless expects the immediate inflation picture to worsen. Based on energy prices at the close of business on 14 September, a short-term Bank staff projection puts CPI inflation at around 3.75% in the fourth quarter of 2026 and slightly above 4% in early 2027. The decision to hold rates therefore does not reflect confidence that headline inflation has peaked; it reflects the MPC's judgement that the evidence of the energy shock spreading into wages and broader price-setting remains limited enough, for now, to avoid another increase in Bank Rate.
Annual CPI inflation increased from 2.6% in June to 2.9% in July and 3.1% in August, taking it 1.1 percentage points above the Bank's 2% target. The composition of that increase is central to understanding the September decision because the latest acceleration has been concentrated heavily in energy and transport rather than accompanied by a comparable resurgence in underlying inflation.
Global energy prices have risen sharply since the July Monetary Policy Report. By 14 September, Brent crude was 36% higher than during the period leading into the July report and UK wholesale gas prices were up 78%, with Brent reaching $106 a barrel and wholesale gas 207 pence per therm. These increases were already feeding through to consumers: petrol prices rose 9.1p per litre between July and August to 161.3p, diesel increased 14.2p to 181.8p, and annual motor-fuel inflation accelerated from 15.5% to 23.0%.
The Bank estimates that direct energy effects account for around 0.7 percentage points of the current 1.1-point overshoot above target. On that basis, approximately 63.6% of the overshoot is directly attributable to energy, helping explain why the MPC is treating the rise in headline CPI differently from a comparable increase generated across a much broader range of domestic prices.
That distinction may become harder to maintain if high energy prices persist. The Bank now expects the direct energy contribution to inflation to increase over coming quarters, with its short-term projection for CPI reaching around 3.75% in late 2026 and slightly above 4% in the first quarter of 2027, compared with a 3.2% fourth-quarter projection in July.
Underlying inflation measures have so far behaved differently from the headline rate. Core CPI, which excludes energy, food, alcohol and tobacco, remained at 2.6% in August and has been at that level since May, while services inflation stood at 3.4%, unchanged from July and below the 3.6% recorded in June. Goods inflation, by contrast, accelerated from 2.2% in July to 2.7% in August.
The MPC's September assessment reinforces that distinction. Services inflation has fallen from 4.5% in March to 3.4% in August, while the indirect transmission of the energy shock into other consumer prices has so far been smaller than policymakers initially expected. The Bank noted, for example, that food inflation had been weaker than anticipated and that its Agents now expected annual food inflation of around 4% at the end of 2026, compared with expectations of 6–7% in April.
That does not mean the risk has disappeared. Companies may temporarily absorb higher costs through margins, hedging or other buffers, delaying rather than eliminating the eventual pass-through to consumers. The MPC therefore continues to focus heavily on second-round effects: whether an external energy shock begins to influence wage settlements, company pricing decisions and inflation expectations sufficiently to create more persistent domestic inflation. So far, the Committee says there has been little evidence of material second-round effects, but it judges that the risk has increased as the energy shock has become larger and more persistent.
The Bank's Decision Maker Panel adds another layer to the inflation picture. Businesses’ year-ahead CPI expectations fell from 3.7% in the three months to June to 3.4% in July and 3.1% in the three months to August, while three-year-ahead expectations were 2.8%.
That produces an unusual divergence. Realised headline CPI rose 0.5 percentage points between June and August, while the DMP's three-month measure of businesses’ year-ahead CPI expectations fell 0.6 percentage points over the corresponding reporting periods. The measures are not directly comparable: CPI records actual consumer-price inflation, while the DMP records businesses’ expectations and its published headline figures are rolling three-month averages. The August survey was also conducted between 7 and 21 August, before the latest CPI publication and before September's central-bank decisions, so it should not be interpreted as a reaction to those later developments.
Nor are all measures of corporate pricing pressure falling. The MPC described firms’ own-price expectations as remaining elevated and said one-year-ahead wage-growth expectations in the DMP stood at 3.4%, broadly unchanged from before the current conflict. The relevant conclusion is therefore narrower: businesses’ expectations for economy-wide CPI have eased while realised headline CPI has risen, adding to the evidence that the current inflation shock has not yet spread uniformly through the domestic economy.
Six MPC members — Andrew Bailey, Sarah Breeden, Swati Dhingra, Clare Lombardelli, Dave Ramsden and Alan Taylor — voted to maintain Bank Rate at 3.75%, while Greene, Mann and Pill preferred an increase to 4%. The split is important because the disagreement is not principally about whether the inflation outlook has worsened; the Committee collectively judges that inflation risks have become more tilted to the upside since July. The disagreement is over whether that deterioration already warrants additional monetary tightening.
For the majority, limited evidence of second-round effects sits alongside already restrictive financial conditions and continuing softness in parts of the labour market. The Bank noted that higher market rates have passed rapidly into borrowing costs, with quoted rates on two-year fixed mortgages around 95 basis points higher than before the conflict. Most members considered that this tightening in financial conditions was already providing a broadly sufficient degree of monetary restraint while the Bank waited for more evidence about how the energy shock was propagating.
The three members favouring a rise placed greater weight on the danger of responding too late. They pointed to the projected rise in CPI above 4% in early 2027, the possibility that labour-market slack has stopped increasing and the risk that elevated inflation becomes more influential just as another major wage-setting period approaches. Their argument is essentially one of risk management: tightening before second-round effects become clearly visible may prove less costly than waiting until inflation has become more deeply embedded.
The UK labour market remains one of the main reasons not to interpret the 3.1% headline inflation rate in isolation. Unemployment was 4.9% in the three months to July, while payrolled employee numbers were 101,000 lower in July than a year earlier and the provisional August estimate indicated a year-on-year decline of 145,000. Vacancies also fell to 702,000 in the three months to August, while regular earnings growth was 3.5% and total earnings growth eased to 3.9% from 4.2% in the preceding three-month period.
The Bank's interpretation is more nuanced than a straightforward weakening story, however. It continues to judge that labour demand is soft and that there is some slack in the economy, but employment indicators have recently shown signs of stabilisation. Economic activity has also been stronger than policymakers expected: GDP grew 0.4% in the second quarter, 0.1 percentage points above the July forecast, while monthly GDP rose another 0.4% in July. Bank staff consequently updated their estimate of third-quarter growth to 0.4%, compared with 0.1% in the July Report.
That resilience cuts both ways for monetary policy. It reduces concern that another rate increase would be imposed on an economy deteriorating as rapidly as previously feared, but it also raises the possibility that there is less spare capacity available to absorb higher energy costs without them feeding through into wages and domestic prices.
The decision to hold means the Bank of England has not followed the Federal Reserve and European Central Bank in raising policy rates this month. The Federal Open Market Committee increased its target range by 25 basis points to 3.75%–4.00%, while its September projections showed the median participant assessment of the appropriate end-2026 federal funds rate increasing from 3.8% in June to 4.1%. The 2027 median also moved from 3.6% to 4.1%.
The ECB raised its three key policy rates by 25 basis points on 10 September, taking the deposit facility rate to 2.50%, after euro-area inflation increased to 3.3% in August. It also cited inflation pressures associated with the Middle East conflict while describing economic activity as resilient.
Those policy decisions are not directly comparable because the three economies face different combinations of growth, labour-market conditions and domestic inflation, while their inflation frameworks also differ. The useful comparison is narrower: the same broad global energy shock is producing different policy responses according to how strongly each central bank believes that shock is interacting with domestic inflation pressure.
Alongside the interest-rate decision, the MPC unanimously approved a multi-year plan for completing the unwind of government bonds accumulated through quantitative easing. After setting aside £120bn of gilts to back current and future banknote issuance, the Bank has £368bn of monetary-policy holdings to unwind. Of that amount, £222bn is expected to mature naturally and £146bn will need to be sold.
The Bank intends to conduct £20bn of active gilt sales annually, alongside maturities, resulting in an average annual reduction of approximately £46bn through to September 2034. The monetary-policy gilt portfolio had been reduced by £70bn during the preceding 12 months, including £21bn through sales, so the new framework provides a longer and more predictable path for the remaining unwind.
The MPC continues to regard Bank Rate as its principal tool for adjusting monetary policy, with the multi-year QT framework intended to make the balance-sheet reduction gradual and predictable rather than functioning as a substitute for changes in the policy rate.
The September decision leaves the Bank confronting a more complicated inflation problem than the headline 3.1% CPI rate alone suggests. Nearly two-thirds of the current overshoot above target is directly attributable to energy, and the Bank's short-term projection now puts inflation slightly above 4% in early 2027. Yet core CPI has not risen, services inflation is below its June level, business expectations for year-ahead CPI have eased and the labour market still shows evidence of softness.
That combination explains why six MPC members were willing to hold Bank Rate at 3.75% even as they acknowledged a deterioration in the balance of inflation risks. Governor Andrew Bailey's assessment captures the tension: domestic inflationary pressures have continued to ease and evidence of second-round effects remains limited, but a prolonged Middle East conflict and a greater likelihood of those effects emerging could eventually require tighter policy.
The next phase of the rate debate will therefore depend less on whether higher energy prices push headline CPI further above target — the Bank already expects that — and more on whether those increases begin to alter wages, margins, company pricing and inflation expectations. Three members of the MPC believe the risks already justify higher rates; six still consider the evidence of broader propagation insufficient to increase Bank Rate now.
