The Bank of England kept interest rates on hold on Thursday but warned they might have to go up if the Iran war drags on, while predicting British inflation will top 4% early next year. The BoE’s Monetary Policy Committee voted 6-3 to keep rates at 3.75%.
BOE’s Monetary Policy Committee (MPC) voted 6-3 to maintain the Bank Rate at 3.75% at its Sep-26 meeting, in line with market expectations. Three members continued to favour a +25bps increase to 4.00%, unchanged from Jul-26, reflecting persistent concerns over inflation risks. The MPC highlighted elevated energy prices and geopolitical tensions in the Middle East as key upside risks to inflation.
Inflationary pressures remain elevated despite the current restrictive monetary policy stance. The UK headline CPI inflation accelerated to +3.1%yoy in Aug-26 (Jul-26: +2.9%yoy), remaining above the BOE’s +2.0% target, driven partly by higher energy prices. Neverthless, policymakers noted limited evidence of significant spillovers into wages and broader domestic price pressures.
The MPC reiterated that monetary policy will remain sufficiently restrictive until inflation is judged to be returning sustainably to target. In addition, the Committee unanimously agreed to continue reducing its stock of government bond holdings, targeting an average balance sheet reduction of approximately GBP46b per year through 2034, as part of its longer-term quantitative tightening strategy.
MBSB in its note said it expects the BoE to retain a hawkish bias over the remainder of 2026 as inflation remains above target and energy-related risks continue to build. The higher CPI inflation, coupled with the continued 6-3 voting split, suggests a growing willingness among policymakers to tighten further should price pressures prove more persistent than anticipated. As such, we see scope for an additional +25bps rate hike later this year if the UK inflation continues to surprise on the upside.
