Bank of England Expected to Hold Rates as Energy Shock Fuels Inflation Concerns

LONDON — The Bank of England is widely expected to keep its benchmark interest rate unchanged at 3.75% at its latest policy meeting, even as a sharp rise in energy prices linked to the conflict involving Iran has intensified concerns over inflation and prompted renewed discussion of a possible rate increase later this year.

Most economists surveyed by Reuters expect the Bank to leave borrowing costs unchanged for the remainder of 2026. However, divisions are emerging within the Monetary Policy Committee, with three of its nine members expected to support an increase in interest rates at the current meeting.

The increase in energy prices has complicated the Bank’s efforts to bring inflation back to its 2% target. UK consumer price inflation currently stands at 3.1%, and economists cited by Reuters expect inflation could rise to around 3.9% early next year if energy costs remain elevated.

Financial markets have meanwhile increased their expectations of tighter monetary policy. Markets were pricing in an approximately 80% probability of a quarter-point rate increase in November, potentially followed by further increases over the subsequent year if inflationary pressures persist.

The Bank faces a difficult policy balance because higher energy prices can raise inflation while simultaneously weakening household purchasing power and economic activity. Recent labour-market data showed signs of softer conditions, with average weekly earnings excluding bonuses increasing by 3.5% in the three months to July and vacancies falling to 702,000.

The number of employees on UK payrolls also declined by 26,000 in August, while private-sector wage growth slowed to 2.9%, its weakest pace since late 2020. These developments could reduce some of the underlying pressure on inflation and provide an argument for maintaining the current rate.

The Bank is also expected to provide an annual update on its programme for reducing its holdings of government bonds. Reuters reported that policymakers may consider halting sales of longer-dated government bonds, a move that could have implications for the management of UK government debt ahead of the finance minister’s October budget.

The latest policy debate comes as central banks globally reassess interest-rate settings in response to renewed energy-price pressures. The Bank of England’s decision will be closely watched by financial markets, businesses and households as policymakers weigh persistent inflation against signs of weakness in the UK labour market.

The outcome will also provide an indication of how policymakers view the duration and impact of the current energy shock and whether it is likely to require a further adjustment in borrowing costs later in the year.