Bank of England set to hold rates despite rising inflation

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Bank of England set to hold rates

Highlights

Markets see an 80%+ chance of a rate hold.
U.K. inflation rose to 3.1% in August.
Motor fuel prices surged 23% year over year.
A 25-basis-point November hike is widely expected.

Markets assign more than an 80% probability to rates remaining unchanged at Thursday’s meeting, while a rise of at least 25 basis points is widely expected in November, CNBC reported. The Bank of England has made no rate changes this year after its most recent move, a 25-basis-point cut in December.

Inflation complicates the Bank of England outlook

U.K. consumer-price inflation accelerated to 3.1% in August, moving above 3% for the first time since March. The Office for National Statistics attributed much of the increase to motor fuels, whose prices jumped 23% from a year earlier.

That creates a difficult backdrop for the Bank of England. Britain is a net energy importer, leaving households and businesses particularly exposed to global fuel-price shocks. Higher energy costs are filtering through an economy that has already endured years of elevated living expenses.

Still, the latest inflation and labor-market figures have not been strong enough to persuade investors that policymakers will act immediately. Instead, market expectations have shifted toward a possible November increase.

Britain diverges from global tightening

Keeping rates steady would contrast with decisions elsewhere. The Federal Reserve raised its benchmark rate by 25 basis points on Wednesday, its first increase since 2023, while the European Central Bank delivered its second increase of 2026 last week. The Bank of Japan is also expected to raise rates on Friday.

The divergence reflects the particular challenge facing British policymakers: inflation is accelerating, but borrowing conditions are already unusually restrictive.

Pressure is visible in the government bond market. Britain currently has the highest borrowing costs among G7 economies, with yields on long-dated 20- and 30-year gilts approaching 6% amid concerns over inflation, fiscal policy, and political uncertainty.

November becomes the next policy test

A decision to wait would not mean the Bank of England is overlooking the inflation threat. Instead, it would give policymakers more time to determine how much of the latest increase reflects energy shocks and whether those pressures are spreading through wages, services, and consumer prices.

The November meeting could therefore become more consequential. With inflation at 3.1%, well above the 2% target, policymakers face growing pressure to prevent temporary energy-driven increases from becoming persistent.

At the same time, higher rates would add to already elevated financing costs for households, businesses, and the government. That balance helps explain why markets expect the Bank to hold now while preparing for possible tightening later this year.

We also reported Goldman Sachs forecasts a Bank of England rate hike in November as inflation risks persist.

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