The Bank of England is widely expected to leave its benchmark interest rate at 3.75% at its September 17 policy meeting, despite UK inflation moving above the central bank’s target. Market pricing puts the chance of a hold above 80%, while traders increasingly expect the bank to raise rates by at least 25 basis points at its November meeting.
That would leave the UK temporarily out of step with several other major central banks. The US Federal Reserve raised rates by 25 basis points on September 16, marking its first increase since 2023. The European Central Bank announced its second rate increase of the year last week after raising rates for the first time in three years in June. The Bank of Japan is also widely expected to lift its key rate when its two-day meeting ends on September 18.
UK inflation moves back above 3%
Data released by the Office for National Statistics on September 16 showed that the consumer price index rose 3.1% year on year in August, its first move above 3% since March. Motor fuel prices were one of the main drivers, rising 23% from a year earlier.
The Bank of England targets inflation at 2%. The sharp rise in fuel prices, however, largely reflects changes in energy markets and external supply conditions. Policymakers will be watching whether those increases continue to feed through into wages, services prices and companies’ operating costs when assessing the next move in rates.
The UK is a net energy importer, and the economy is still absorbing the effects of the post-pandemic inflation shock and the disruption to gas supplies caused by the Russia-Ukraine war. The renewed rise in energy prices could add to household bills and business input costs, slowing the decline in inflation after the cost-of-living squeeze that has not fully eased.
Rates and gilt markets add pressure
The UK government bond market has been affected this year by global inflation concerns, doubts about fiscal policy and political uncertainty. The country currently has the highest borrowing costs in the Group of Seven, with 20-year and 30-year gilt yields approaching 6%. Higher long-term yields increase the government’s refinancing costs and also feed into corporate borrowing, property valuations and risk pricing across financial markets.
Earlier this week, reports indicated that the Bank of England could announce a halt to sales of 20-year and 30-year gilts when it publishes its rate decision. If confirmed, the focus would shift beyond the policy rate to the bank’s quantitative tightening programme and the effect of its bond holdings on long-dated gilt supply and demand. The proposal remains a policy option under consideration, and the final details will depend on the Bank of England’s formal announcement.
Bank of England Governor Andrew Bailey and Federal Reserve Chair Kevin Warsh appeared together at the Jackson Hole Economic Policy Symposium on August 28. While the Fed has already raised rates, the Bank of England may pause, reflecting differences in the two economies’ inflation structures, energy dependence and growth conditions rather than a simple divergence from the global rate cycle.
November hike expectations build
Scott Gardner, an investment strategist at J.P. Morgan Personal Investing, said the August inflation increase was “unlikely to prompt the Bank of England to raise rates immediately,” but could lead policymakers to reassess the inflation outlook. He said the US-Iran conflict had lasted more than six months and that higher energy costs were still gradually feeding into business input prices and household spending.
Shreyas Gopal, a foreign-exchange strategist at Deutsche Bank, said the UK employment and inflation data released this week contained no surprise large enough to clearly push policy in a more hawkish direction. That had led markets to scale back expectations for a September hike. A September hold would not mean inflation pressures had disappeared; attention is shifting to whether the Bank of England acts in November and whether energy prices and services inflation remain elevated.
For sterling, UK gilts and other interest-rate-sensitive assets, the significance of the September meeting will extend beyond whether the 3.75% rate is unchanged. Investors will also focus on how the Bank of England explains the 3.1% inflation reading, whether it provides details on long-dated gilt sales and how it frames the path for future rate increases.