The Bank of England is expected to hold its benchmark rate at 3.75% on Thursday even as UK inflation accelerates to a six-month high. The decision comes as the labour market continues to soften and other major central banks have already raised rates.
The Bank of England's Monetary Policy Committee is expected to keep the Bank rate unchanged at 3.75% for a sixth consecutive meeting when it announces its decision at noon on Thursday. Economists remain divided on whether a hike will follow before year-end.
Inflation accelerates as the Middle East conflict weighs on oil
Official figures released Wednesday showed the Consumer Prices Index rose to 3.1% in August from 2.9% in July, its highest rate in six months, driven by higher petrol, diesel and airfare costs. The Bank targets 2% inflation.
Oil prices moved above $100 a barrel on 9 September and have stayed there amid the prolonged Iran war, with few signs of a lasting truce. Following its July meeting, the MPC indicated it could raise rates if the conflict escalated further. Bank of England governor Andrew Bailey told the BBC at the time that if oil prices stayed above $100 a barrel, "the odds are that interest rates will have to go up higher."
Other central banks have already moved
The MPC meets aware that other major central banks have acted first. The European Central Bank recently raised interest rates to 2.5%, citing the Middle East conflict and warning inflation was set to remain well above target for some time. The US Federal Reserve raised its rate to 3.5%-3.75% on Wednesday for similar reasons.
Money markets are still pricing further UK tightening ahead. As of Wednesday night, investors were pricing in four quarter-point increases by the end of 2027, which would lift the Bank rate from 3.75% to 4.75%.
Mortgage costs climb ahead of the decision
Given those expectations, several major lenders have already increased the cost of new fixed-rate mortgages in recent days. The average two-year fixed residential mortgage rate is at its highest since 11 May, at 5.77%, while the average five-year is at its highest since 8 November 2023, at 5.83%, according to Moneyfacts.
MPC members are also keen not to put pressure on employers and further lower the prospects for those seeking a job.
Sources: BBC News, The Guardian
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