Hold fire! The Bank of England kept its interest rate unchanged at 3.75% as expected, but warned of persistent upside risks to inflation.

The Bank of England held its base interest rate steady on Thursday, yet clearly signaled that it stands ready to tighten monetary policy if elevated energy prices trigger broad and sustained inflationary pressures. This stance aligns with the Federal Reserve’s decision announced the same day. The Monetary Policy Committee (MPC) voted to maintain the base rate at 3.75%, a level unchanged since December last year. Bank of England Governor Andrew Bailey stated: "Our duty is to ensure any rise in inflation remains temporary." Three of the nine MPC members voted in favor of raising the base rate by 25 basis points to 4%, reflecting heightened concern among some officials about the risk of second-round inflation effects. Following the announcement, the pound edged up 0.08% against the U.S. dollar to $1.3376. Felix Feather, economist at Aberdeen, remarked: "This pause by the Bank of England is slightly more hawkish than anticipated." Widening divergence: Three members advocated raising the rate to 4% Among the nine MPC members, Megan Greene, Huw Pill, and Catherine Mann voted for a 25-basis-point hike to 4%, while the remaining six voted to hold. Greene noted that UK inflation has exceeded the target for approximately five consecutive years, and pointed to emerging supply-side pressures—including a second potential energy chokepoint in the Red Sea and constraints in AI hardware supply chains. She stated: "Acting pre-emptively with a rate hike could reduce the likelihood of second-round inflation taking root." Pill emphasized the "profound uncertainty" surrounding the outlook for energy prices, noting that this uncertainty "may persist for an extended and indeterminate period," rendering fine-tuned monetary policy adjustments perilous. He explicitly stated that raising rates now would "send a clear and unambiguous signal to markets that we are both willing and able to respond to inflationary risks emanating from Gulf-region developments."

Exness: Oil prices remain elevated—can the Bank of England (BoE) stay dovish?

Less than two months ago, Bank of England Governor Bailey was still trying to convince markets of one thing: don’t interpret a few committee members’ support for a rate hike as evidence that the BoE is gradually moving toward its next tightening move. With the Middle East situation deteriorating again, crude oil briefly surged past $100 per barrel, re-establishing energy prices as the single largest global driver of inflation. Meanwhile, markets have nearly fully priced in a BoE rate hike in November—and expect cumulative tightening by year-end. Both Goldman Sachs and Citigroup revised their forecasts this week, shifting from earlier expectations of no hikes until 2026 to now anticipating further BoE rate increases. For the pound, this suddenly made Thursday’s BoE meeting significantly more complex than originally anticipated. At its July meeting, the BoE voted 6–3 to hold rates at 3.75%. Although the number of members supporting a hike rose from two to three, the majority still judged that domestic UK inflationary pressures are easing—particularly given cooling labor market conditions and the fact that energy price increases have yet to meaningfully feed through into wages and service prices—making further tightening unnecessary at this stage. Bailey subsequently downplayed market speculation about consecutive rate hikes. The problem, however, is that oil prices were still hovering near $90 at the time. According to Eric, analyst at Exness, what central banks truly worry about has never been oil prices per se—but rather whether energy price increases will trigger second-round inflation: firms passing higher costs onto consumers; workers demanding higher wages due to rising living costs; and those higher wages then pushing up service prices. If it’s just gasoline becoming more expensive, the BoE can tolerate it. But if oil-driven cost pressures begin feeding into wage and service-sector inflation, the BoE will find it extremely difficult to remain patient. At present, there is no definitive answer to this question. UK CPI rose from 2.6% to 2.9% in July, while services inflation remained stuck at 3.6%. Meanwhile, UK GDP grew by 0.4% in July—beating market expectations—and suggests that the UK economy, at least for now, remains robust enough to afford further room for monetary tightening.

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