BoE Holds Rate at 3.75%, Flags November Hike on Energy Risk

The Bank of England held Bank Rate at 3.75% earlier today, with the Monetary Policy Committee voting 6-3 to keep rates on hold. The decision matched what economists had expected, and rates have now stayed at 3.75% for at least six weeks.

The Bank now expects inflation to peak a bit above 4% early next year, driven largely by the risk of a roughly 25% rise in the household energy price cap in January. Deputy Governor Sarah Breeden, who voted to hold rates today, said inflation is approaching levels associated with non-linear effects.

Governor Andrew Bailey suggested the Bank could still raise rates in November. Committee members who voted for a hike today framed it explicitly as risk management, an insurance move against energy-driven inflation, rather than a response to the broader run of economic data.

That framing matters for what comes next. James Smith, developed markets economist at ING, said the entire November decision now hinges on a single variable: whether wholesale energy and gas prices fall in the coming weeks. His base case is that they do, letting the Bank stay on hold and potentially cut rates in 2027.

If energy prices instead stay elevated, Smith expects the Bank to hike in November, with a further increase possible early in the new year.

Smith also argued that markets pricing in four rate hikes over the next year looks overdone, noting no sign yet that rising energy bills are spilling into the rest of the inflation basket.

Energy-intensive goods and services inflation, along with food inflation, are both falling this year, evidence that the price pressure remains contained to the energy component the Bank is watching.