Bank of England holds interest rates at 3.75% for sixth time in a row: What it means for your mortgage and savings

The Bank of England maintained its interest rates at a sixth consecutive meeting, yet cautioned that they may rise in future unless the impact of the Iran war on energy markets subsides. The Monetary Policy Committee voted 6-3 to keep rates unchanged, reflecting disagreements on addressing the surge in prices anticipated due to the Middle East conflict.

In addition, officials announced significant changes to the Bank's quantitative tightening programme, commonly known as bond sales, pausing sales of longer-dated debt and restructuring the way it offloads its gilt holdings. Under new proposals to the Chancellor, the Bank will now annually sell £20 billion of shorter-term debt and retain all its longest-dated debt until it matures.

While most rate-setters believed second-round effects, which occur when the supply shock of higher energy prices becomes embedded in an economy, had not yet materialized in the UK, they acknowledged that risks to inflation were tilted to the upside, greater than during the group's meeting in the previous summer. Governor Andrew Bailey stated, "If the conflict in the Middle East persists for an extended period... and the risk of second-round effects emerging increases, it is likely that policy may have to tighten."

Susannah Streeter, chief investment strategist at Wealth Club, suggested that a rate hike in November is "a distinct possibility." She explained, "Inflation is the fever central bankers want to bring down, but the Bank of England is holding off administering the bitter medicine of an interest rate hike. The UK economy is fragile, and already feeling the chill of sluggish growth and a cooling jobs market, and for now this should offset the risks of steamy energy costs being passed easily through to hotter consumer prices."

Nigel Green, chief executive of Devere, criticized the Bank of England, stating, "Every major central bank at the table is acting except one: the feet-dragging Bank of England. The Fed has moved. The ECB has moved. The Bank of Japan looks ready to move. The Bank of England is choosing stillness while inflation runs hot, and stillness has a cost."

The Monetary Policy Committee had been expected by analysts to maintain policy unchanged, despite August inflation reaching 3.1%, significantly higher than the Bank's target. Growth has outpaced forecasts for much of the year, heating up the economy more than expected. However, the Bank noted that soft labor market conditions, combined with higher borrowing costs already faced by households and businesses due to the conflict, were helping keep inflation in check and maintain the need for rate stability.

Unlike the aftermath of Russia's full-scale invasion of Ukraine in 2022, where wage inflation was higher, Britain's current situation shows languid private sector wages and low vacancies, suggesting a lower risk of a wage-price spiral. External MPC member Catherine Mann pointed out that since her July vote to increase Bank Rate, upside risks to inflation have increased as the "sporadic continuation" of conflict has driven energy prices above baseline.

She added, "Raising Bank Rate is a better risk-management strategy when faced with the uncertainty about inflation dynamics and second-round effects."

In addition to the interest rate decision, MPC members unanimously agreed to overhaul the quantitative tightening programme in a plan agreed to by the Treasury. The Bank will no longer sell its stockpile of government bonds on the secondary market but will instead sell a portion directly to the Treasury. All its longest-dated gilts will also be kept until they mature, marking a significant strategic shift from the monetary authority.

In a letter to the Chancellor, Governor Andrew Bailey explained, "This move provides clarity over the future of its quantitative tightening programme by setting the course of its unwinding up until 2035."