Bank of England holds at 3.75 per cent, breaking with the Fed and the ECB

The Bank of England kept its key interest rate unchanged at 3.75 per cent on Thursday^1,3. It is the sixth hold in a row⁴. The decision came a day after the Federal Reserve raised US rates for the first time in three years, and after the European Central Bank had raised rates twice since June².

The hold is conditional rather than settled. The Bank said rates are likely to rise if high energy prices continue⁴, and warned that the war could force future rises¹. It said inflation is on track to reach 4 per cent by early next year¹. The Times had reported the monetary policy committee was expected to split 6 to 3 in favour of leaving borrowing costs alone⁷.

Why it matters to investors

UK inflation rose to 3.1 per cent in August, with core inflation stable at 2.6 per cent, a reading described as offering some relief ahead of the decision⁶. CNBC noted the Bank was still expected to hold even after inflation reached 3.1 per cent, with energy costs keeping pressure on prices⁵. The Bank said it is monitoring for signs that higher energy costs are spilling over into everyday prices⁸.

The source of the August increase is the same one the Fed cited. Petrol and diesel price rises pushed UK inflation higher, alongside summer holiday costs and disruption to global oil supplies caused by the Middle East conflict¹⁰.

The divergence is what matters for sterling and gilts. The European Central Bank raised rates for the second time this year earlier this month and struck a hawkish tone as energy prices rise⁹. The Fed hiked on Wednesday². London alone has chosen to wait, and the Wall Street Journal devoted its explanation to why the Bank did not follow³.

What to watch

The committee split is the leading indicator. A vote expected at 6 to 3 in favour of holding leaves a minority already arguing the other way⁷. Any narrowing of that margin at the next meeting would be the first hard evidence of a turn, since the Bank has already conceded the direction of travel is up if energy prices hold⁴.

Energy is the swing variable the Bank named itself^4,8. If oil-driven pressure persists, the path it has described leads to a rise rather than a cut, and the inflation forecast it published points to 4 per cent early next year rather than a return to target¹. For UK investors, that combination, a policy rate on hold while inflation is still climbing, means real rates are falling even as they rise almost everywhere else⁹.