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

Three of the nine MPC members voted to raise the benchmark interest rate to 4%, reflecting heightened concern among some officials about the risk of second-round inflationary pressures. The pound edged up 0.08% against the US dollar following the announcement, trading at USD 1.3376. Felix Feather, economist at Aberdeen, commented: "This pause by the Bank of England was slightly more hawkish than anticipated." Widening divergence: Three members advocated raising rates to 4% Of the nine MPC members, Megan Greene, Huw Pill, and Catherine Mann voted in favour of a 25-basis-point hike to 4%, while the remaining six voted to hold rates steady. Greene noted that UK inflation has remained above the target for approximately five consecutive years, and that new supply-side pressures are emerging—including a second potential energy chokepoint in the Red Sea, alongside constraints in the AI hardware supply chain. She stated: "Acting pre-emptively with a rate hike could reduce the likelihood of second-round inflationary effects taking root." Pill stressed the "profound uncertainty" surrounding future energy prices, warning that this uncertainty "could 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 arising from developments in the Gulf region." Energy price volatility undermines policy path anchoring The backdrop to this decision is complex. Since the outbreak of the US–Iran conflict at the end of February, oil and gas prices have experienced sustained and sharp volatility, with fluctuating expectations of a potential closure of the Strait of Hormuz leaving markets unable to price risk reliably. Global central bankers broadly fear that if energy prices remain elevated for an extended period, firms’ profit-protection motives may drive further price hikes, while workers—seeking to preserve purchasing power—may press for higher wages, thereby triggering a self-reinforcing "second-round" inflation dynamic.

ATFX: Today’s focus is on the UK’s July ILO unemployment rate; market consensus stands at 5%.

Historically, the UK’s ILO unemployment rate rose steadily from 3.9% at the start of 2024 to 5.2% by late 2025—reaching a near-decade high. From 2026 onward, the rate began to decline; as of June this year, it stood at 4.9%, already within the 5% threshold widely regarded as indicative of full employment. This improvement in the UK labour market helps alleviate concerns that the Bank of England may need to tighten monetary policy further. Should today’s reported figure rise—as expected—it could disrupt the current sideways or downward trend in unemployment, thereby influencing forecasts for the Bank’s future monetary policy stance. Figure 2: US Unemployment Rate Data – ATFX Given the close economic ties between the UK and the US, their historical unemployment trends often move in tandem. The US unemployment rate stood at 4.1% in July and held steady in August—down from 4.2% in June. Since November 2025, the US unemployment rate has been on a downward trajectory, signalling continued labour market improvement. Considering this synchronicity, we believe the UK’s July ILO unemployment rate may fall below June’s 4.9%—i.e., below market expectations. If so, it would indicate a stronger-than-expected UK labour market, supporting UK equities and the pound. Figure 3: UK Inflation Rate Data – ATFX The Bank of England’s dual mandate is to sustain high employment and keep inflation low. The UK’s headline CPI annual rate for July stood at 2.9%, up from 2.6% in the prior month and marking a four-month high. Compared with US inflation—which has remained above 3%—UK inflation is relatively well contained, partly due to the UK government’s energy price regulation measures. Nevertheless, tensions in the Middle East show no signs of easing. Vessel traffic through the Strait of Hormuz remains subdued, and Brent crude has breached the USD 100 per barrel mark—leaving the UK exposed to elevated latent inflationary risks.

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UK Inflation Rises to Five-Month High Before BOE Decision

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