UK inflation rises ahead of the central bank's interest rate decision, narrowing the window for holding rates steady.

The UK’s energy regulator, Ofgem, raised the household energy price cap by 13% in early July, directly pushing up electricity and gas prices. Meanwhile, Brent crude oil has recently surged above $100 per barrel, and Ofgem has already announced plans to raise the energy price cap again in October—suggesting that energy prices may continue to support inflation over the coming months. David Rees, Schroders’ Global Head of Economics, said UK inflation could rise further over the next few months, as energy, industrial goods, and food prices continue to pass through to end consumers. According to The Wall Street Journal, markets currently expect UK CPI to reach or exceed 4% at the start of next year—twice the Bank of England’s 2% target. Core inflation stable, temporarily preserving room for观望 However, rising headline inflation does not mean price pressures have broadened across the economy. In August, core inflation—excluding energy and food—held steady at 2.6%, while services inflation—a key focus for the Bank of England—remained unchanged at 3.4%. This suggests current inflationary pressures remain largely concentrated in external factors such as energy, rather than evolving into broader domestic price pressures. Francesco Pesole, strategist at ING, noted there is “still no evidence of inflation spreading beyond energy,” lending support to the dovish stance within the Bank. A cooling labor market also provides some breathing room for the Bank to hold off on action. Official data released Tuesday showed private-sector wage growth (excluding bonuses) for the three months to July stood at 2.8%, down from 2.9% previously; overall weekly earnings growth remained at just 2.9% year-on-year. David Rees pointed out that current wage trends have not yet revived the wage-price spiral seen in 2022. In other words, so long as the energy shock does not further accelerate wages and service prices, the Bank still has grounds to observe—and avoid immediate rate hikes—in response to energy-driven price increases. The Bank’s wait-and-see strategy faces mounting pressure The issue lies in the duration and transmission scope of the energy shock. Since mid-February—when Middle East tensions escalated—the Bank has held rates steady, waiting for clearer evidence on whether inflation will persist; at its last meeting in July, the Monetary Policy Committee (MPC) voted 6–3 to hold rates unchanged, revealing growing internal divisions. Yael Selfin, Chief Economist at KPMG, said rising energy prices could test the Bank’s “wait-and-see strategy.” She argued that current price increases do not appear driven by overheating demand or second-round effects—but if inflation persists, the Bank may deliver a pre-emptive hike in November. Until then, the energy price shock remains an external factor largely beyond the Bank’s direct control.

Hold steady! The Bank of England keeps interest rates unchanged at 3.75% as expected, but warns of persistent inflationary pressures.

The Bank of England kept its base interest rate unchanged on Thursday, but sent a clear signal: it stands ready to tighten monetary policy if persistently high energy prices trigger broad and sustained inflationary pressures. This stance aligns with the Federal Reserve’s decision announced the same day. The Bank’s 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 job is to ensure any rise in inflation proves temporary." Three of the nine MPC members voted to raise the base rate by 25 basis points to 4%, reflecting heightened concern among some officials about the risk of secondary inflationary effects. The pound edged up 0.08% following the announcement, trading at $1.3376 against the US dollar. Felix Feather, economist at Aberdeen, commented: "This was a slightly more hawkish pause than expected from the Bank of England." Widening divergence: Three members vote for a hike to 4% Of the nine MPC members, Megan Greene, Huw Pill, and Catherine Mann voted to raise the base rate by 25 basis points to 4%; the remaining six voted to hold. Greene noted that UK inflation has run above target for nearly five years, and added that new supply-chain constraints—including a second chokepoint emerging in the Red Sea and bottlenecks in AI hardware supply chains—are adding further supply-side pressure to markets. She argued that “acting proactively now with a rate hike could reduce the likelihood of second-round inflationary effects taking root.” Pill emphasized the “profound uncertainty” surrounding the outlook for energy prices, warning that this uncertainty “could persist for a prolonged and indeterminate period,” making 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.”

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UK Bank of England officials are divided on interest rate hikes as energy price shocks continue, with debates centering on whether businesses will absorb costs or pass them to consumers amid rising oil and gas prices.

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