Bank of England Expected to Hold Interest Rates as War Fuels Inflation Risks

LONDON — The Bank of England is expected to keep its benchmark interest rate at 3.75% for the remainder of the year as policymakers adopt a cautious approach to inflationary pressures arising from the ongoing conflict in the Middle East, according to a Reuters poll of economists.

All 65 economists surveyed by Reuters between September 4 and 8 expect the Monetary Policy Committee (MPC) to leave Bank Rate unchanged at its September 17 meeting. Some 57 economists, or nearly 90% of those surveyed, also expect rates to remain at 3.75% through the end of 2026.

The cautious stance comes as higher energy prices linked to the conflict involving the United States, Israel and Iran have complicated the outlook for British inflation. Brent crude has been approaching $100 a barrel, although economists said there has so far been limited evidence that higher energy costs have generated broader inflationary pressures across the economy.

UK inflation was last recorded at 2.9%, above the Bank of England’s 2% target. Economists expect inflation to peak at around 3.3% in November before gradually easing. The Reuters poll forecast average inflation of 3.1% in 2026, declining to 2.5% in 2027 and 1.9% in 2028.

The MPC remains particularly focused on whether higher energy prices could generate so-called second-round effects, such as stronger wage demands and persistent increases in the prices of goods and services. Economists said there was currently insufficient evidence of such effects to warrant an immediate rate increase.

Three of the nine MPC members voted for a rate increase at the Bank’s July meeting, compared with two previously, highlighting the growing divide within the committee over the inflation outlook. Nevertheless, the latest poll suggests that the majority of policymakers are likely to maintain the current rate while monitoring economic developments.

Financial markets have taken a more cautious view, with investors pricing in potential rate increases through 2027. Bank of England Governor Andrew Bailey said on Tuesday that interest-rate decisions would depend on evolving economic and geopolitical conditions and rejected the idea that a rate increase was inevitable.

The Reuters poll also indicated that UK economic growth is expected to remain modest, averaging 1.1% in 2026 and 1.2% in 2027, before accelerating to around 1.5% in 2028. The median forecast puts the Bank’s next move as a quarter-point rate cut in the third quarter of 2027.

The outlook remains highly dependent on developments in global energy markets and the duration of the Middle East conflict, with a prolonged rise in oil prices posing a significant risk to the UK’s inflation trajectory.