Bank of England Expected to Hold Rate as Inflation Poses Tough Choices

What changed

The Bank of England is expected to hold its Bank Rate at 3.75% for a sixth consecutive meeting when the Monetary Policy Committee announces its decision at 12:00 BST on Thursday.

The pause comes as UK inflation rises: CPI reached 3.1% in August, up from 2.9% in July, driven by petrol, diesel and airfares. Oil has stayed above $100 a barrel since 9 September, keeping open the possibility of a rate increase later this year.

Why it matters

The Bank is caught between two unpleasant pressures. Higher rates could help stop energy-price increases from spreading through the wider economy, but they would also make borrowing more expensive and further weaken demand.

Mortgage borrowers are already feeling the squeeze. The average two-year fixed mortgage rate has reached 5.77%, while the average five-year rate is 5.83%. Lenders have raised the cost of new fixed-rate deals, increasing refinancing pressure for households whose current fixes are ending.

Higher oil prices also work their way through petrol, transport and goods. If that continues, households may have less money for discretionary spending. Employers could face weaker demand and higher energy and transport costs; if the Bank responds with further tightening, hiring and investment may weaken over the following months.

Savers may receive better nominal returns, but inflation above the Bank’s 2% target reduces what those returns can buy. The central question is whether the energy shock fades before it becomes embedded in broader prices and wages.

The last time this happened

In its November 2022 monetary policy report, the Bank was responding to a conflict-driven energy shock after Russia’s invasion of Ukraine. Inflation was then above 10%, and the MPC raised Bank Rate to 3%.

The structure was similar: energy costs lifted prices, squeezed household spending and forced the Bank to balance inflation control against weaker activity. The difference is scale and composition. That episode was mainly a European gas shock, with inflation far higher and the Bank actively raising rates; the current pressure is centred on oil, with CPI at 3.1% and an expected pause.

UK CPI later fell from 11.1% in October 2022 to 2.3% in April 2024, helped chiefly by falling gas and electricity prices. That precedent suggests energy prices may determine the first move in inflation, while interest rates matter more for preventing the shock from becoming a lasting domestic price problem. It is a useful mechanism, not a forecast: oil and gas behave differently, and the current conflict may take a different path. The Bank of England’s November 2022 report

What to watch next

The Bank’s guidance on Thursday will show whether it still sees a later increase as plausible. The next inflation release will reveal whether fuel and transport costs are spreading into food and other categories. Mortgage pricing in the days that follow will show whether lenders continue raising fixed rates or begin cutting them.