The Bank of England maintained its policy rate at 3.75% on Thursday but warned that if Middle Eastern conflicts persist and the risk of secondary effects increases, there may be a need to tighten monetary policy.
Economic Forecasts
Andrew Bailey, the bank's governor, said: "If the conflicts in the Middle East continue for an extended period, and the risk of secondary effects increases, it is likely that policies will need to be tightened." The Monetary Policy Committee voted 6 to 3 to maintain the bank rate, which was in line with market expectations. Three committee members voted for a 25 basis point increase to 4%.
Inflation Rate and Energy Impacts
The annual consumer inflation rate rose to 3.1% in August, above the bank's 2% target. Based on energy prices as of September 14, inflation is expected to rise to around 3.75% in the fourth quarter of 2026 and slightly above 4% in early 2027.
The bank stated that prolonged conflicts in the Middle East have contributed to rising prices for crude oil, natural gas, and refined products, worsening the inflation outlook. Brent crude oil prices have increased by 36% since the bank's July report, and wholesale gas prices in the UK have risen by 78%, reaching $106 per barrel and 207 pence per therm, respectively.
Bailey noted that the shock from rising energy prices has so far had a limited impact on UK prices and wages but warned that prolonged volatility may increase the likelihood of a bank rate hike.
Three members in favor of the rate increase stated that the expected peak inflation in early 2027 would coincide with wage negotiations, raising the likelihood that rising energy costs could create secondary effects. However, the majority believed that current financial conditions and weakness in the labor market provide sufficient constraints.
The UK economy grew by 0.4% in the second quarter, and the bank has forecasted that the same growth rate will hold for the third quarter, above the previous forecast of 0.1%. The unemployment rate for the quarter ending in July is estimated to be around 4.9%, with private sector wage growth at approximately 3.5%.
The committee also unanimously approved a plan to fully reduce government bonds acquired under quantitative easing programs. The bank intends to reduce its remaining monetary policy portfolio valued at £368 billion ($491.8 billion) at an average annual pace of £46 billion, including £20 billion in annual sales, by September 2034.
