Bank of England holds rates at 3.75%, warns
The Bank of England held its main interest rate at 3.75% but signaled a likely increase if high energy prices persist, citing Middle East conflict impacts.
The Bank of England has held its main interest rate at 3.75% for a sixth consecutive meeting. Governor Andrew Bailey warned that rates are likely to rise if high energy prices, driven by Middle East conflict, persist.
The central bank's Monetary Policy Committee voted six to three to maintain the rate. Chief Economist Huw Pill was among the three members who voted for an immediate increase to 4%.
Bailey stated the direct impact of higher energy prices is clear. Officials are still assessing how far those costs will feed into broader inflation. "For interest rates to come down there would need to be an end of conflict in the Middle East..." he said, according to the BBC report.
The Bank raised its inflation forecast, predicting it will be slightly above 4% at the start of next year. It warned the household energy price cap for January is now expected to rise substantially further. The UK's official inflation target is 2%, but inflation has been above that for nearly two years, hitting 3.1% in August.
Economic forecasts and inflation
The Bank offered some positive revisions. It said the UK economy had been more resilient than expected, raising its growth forecast for July to September from 0.1% to 0.4%.
It also revised its food price inflation forecast downwards. Because the effect of higher energy costs has not yet spilled over widely, food price inflation is now predicted to be 4% by year-end. This is less than the previous forecast of 6-7%.
Impact on mortgages
Given market expectations of future rate rises, major lenders have already increased the cost of new fixed-rate mortgages. Financial information service Moneyfacts provided average rates.
| Mortgage Type | Average Rate | Notes |
|---|---|---|
| Two-year fixed residential | 5.77% | Highest since 11 May |
| Five-year fixed residential | 5.83% | Highest since 8 November 2023 |
Borrower Andy Pargeter from Flintshire told the BBC he and his wife are coming off a five-year fixed rate of 1.19% in November. They now expect to pay around £300 more per month. "We're in a fortunate position where we're able to accommodate that," he said, but expects it will affect their monthly savings.
Bond sales overhaul
Alongside the rate decision, the Bank announced a major change to its quantitative tightening (QT) programme. It will halt its annual sales of government bonds and instead sell off the holdings in smaller chunks over eight years.
The Bank had bought £895bn of mainly government bonds during crises like the 2008 financial crash and the Covid pandemic, a policy known as quantitative easing (QE). Since 2022, it has been offloading these bonds. This QT process has contributed to higher bond yields, making government borrowing more expensive.
The Bank stated discussions to reduce the current £488bn stockpile began a year ago, implying the decision was not a direct reaction to recent yield increases.
The news prompted an immediate market reaction. The yield on 30-year UK government bonds fell from 5.86% to 5.75%. Yields on 10-year bonds dropped from 5.31% to 5.22%.
The Bank's move follows actions by other major central banks. The US Federal Reserve announced its first rate hike in three years on Wednesday, while the European Central Bank has raised rates twice since June.
